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The Rise of Cryptocurrency Hedge Funds

by Dominic Fogarty

  • 04 May 2018
  • HF

Cryptocurrencies have been a point of contention among both personal and institutional investors over the past year, as volatility continues to define the space. There are now more than 1,500 different cryptocurrencies available – including Bitcoin, Ethereum and Ripple (with the latter eating into Bitcoin’s market cap) – as well as an influx in Initial Coin Offerings (ICOs), which aim to improve on blockchain technology. Hedge funds are moving into the cryptocurrency space to take advantage of the price of the underlying assets, though it requires skill to successfully achieve the long-term positive returns that these volatile investments can offer.

Preqin’s online platform now tracks 75 cryptocurrency hedge funds – including funds of funds – of which 45 were launched as Bitcoin hit its record high in 2017. Preqin defines a cryptocurrency hedge fund as an open-ended private vehicle available to sophisticated investors that actively invests in cryptocurrency markets. With more crypto-focused firms preparing to launch funds, growth will likely continue throughout the year.

Most cryptocurrency funds take a buy-and-hold approach, while other managers engage in active trading through long-only and long/short approaches. These funds are active in physical cryptocurrencies as well as investing in recently formed futures markets. Typically, managers decide which cryptocurrencies, tokens or ICOs to trade based on market share, liquidity and volatility, as well as whether they provide a real-life use case or benefit their blockchain technology. An alternative strategy revolves around asset-backed lending, where the cryptocurrency bought is used as collateral for a loan.

Cryptocurrency funds offer investors indirect exposure to the volatile cryptocurrency market with the potential to achieve significant returns; Global Advisors Bitcoin Investment Fund had a net return of 330.08% in 2017 (as reported in Preqin Special Report: Top Performing Hedge Funds in 2017). However, cryptocurrency is still a young asset class for alternatives and for hedge funds, and as such opinions are divided: some fund managers believe it to be “a very immature asset, not institutional quality”, or that cryptocurrencies “are a current fad; the lack of transparency and institutional requirements will keep these funds as niche players.” Others believe that it will be “a major asset class in 2018” with “potential to grow dramatically” as the market cap of cryptocurrency coins and tokens increases1. As greater scrutiny is placed on cryptocurrency by regulators and the asset class matures, it will be interesting to see how cryptocurrencies impact the hedge fund universe in 2018.

 1 These views and more survey results on cryptocurrency hedge funds can be found in the 2018 Preqin Global Hedge Fund Report. 

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