As bitcoin and ether wobble, hedge funds pledge more capital to crypto


As cryptocurrencies continue to experience violent price shocks, new industry research shows crypto hedge funds’ assets under management have almost doubled to some USD3.8 billion, with traditional managers increasingly eyeing the sector after returns soared in 2020. 

The third annual ‘Global Crypto Hedge Fund Report 2021’, published jointly by PwC, Elwood Asset Management and the Alternative Investment Management Association, shows crypto hedge fund AUM boomed from USD2 billion in 2019 to USD3.8 billion last year. 

The study’s findings suggest hedge funds are keen to pour yet more money into the rapidly-growing sector amid the clamour for bumper returns – but many remain wary of regulatory uncertainty, client aversion and reputational risk. 

The report – which was led by PwC and digital assets specialist Elwood during Q1 this year – found there are now roughly 150-200 active crypto hedge funds, with four out of five (81 per cent) launched between 2017 and 2020. 

As part of the study, PwC also partnered with hedge fund industry trade body AIMA to survey so-called ‘traditional’ non-crypto hedge fund firms which are gradually stepping into the digital assets space. AIMA quizzed 39 such hedge funds accounting for USD180 billion in AUM, with more than 60 per cent of respondents managing assets of at least USD1 billion. 

Here, the study found that one in five traditional managers – 21 per cent – now invest in digital assets, with the average percentage of their total hedge fund AUM invested standing at 3 per cent. Some 86 per cent of such managers are planning to pour more capital into cryptos by the end of this year, while just 14 per cent said they would maintain the same level of capital deployed. 

“The most common primary reason given by hedge fund managers for including digital assets in their portfolio is ‘general diversification’,” the report noted, with more than half – 57 per cent – responding accordingly. Just under a third – 29 per cent – are looking for ‘exposure to a new value creation ecosystem’, while 14 per cent see digital assets as good inflation hedge. 

Meanwhile, more than a quarter – 26 per cent – of such traditional hedge funds not yet investing in digital assets are in ‘late stage’ planning to investor or looking to invest.  

Regulatory uncertainty is the biggest barrier to investing, according to 82 per cent of respondents, along with client reaction/reputational risk (77 per cent). Some 68 per cent of respondents said digital assets are outside their current investor mandates, and 64 per cent said they do not have enough knowledge or expertise to invest. 

Bitcoin and ether – which both suffered heavy selling over the past week before recovering slightly on Monday – remain the most popular digital coins, traded by 92 per cent and 67 per cent of hedge funds respectively. Litecoin meanwhile is traded by 34 per cent of hedge funds. The report also found well over half (56 per cent) of crypto hedge funds trade derivatives (56 per cent), but short-selling has “drastically” reduced, from 48 per cent to 28 per cent in 2020. 

Returns soared last year, the report noted, with the median crypto hedge fund gain reaching a remarkable 128 per cent in 2020, compared to 30 per cent the year prior. Discretionary long-only funds topped the performance table, gaining 294 per cent median return last year. Discretionary long/short was the best performing hedge fund strategy, up a striking 129 per cent, followed by multi-strategy (114 per cent) and quantitative (72 per cent). 

The report also acknowledged the “extraordinary growth” in decentralised finance, or DeFi, described as the industry’s “buzzword”. 

“Last summer, DeFi started booming and, between April 2020 and April 2021, the trading volume on these platforms grew more than 90-fold, with Uniswap making up for half of the DeFi market volume in April 2021.” 

Author Profile
Hugh Leask
Employee title
Editor, Hedgeweek