Institutional investors stay cautious on crypto, as hedge funds ride bitcoin volatility


As hedge funds continue to ride out cryptocurrencies’ volatility, new industry research suggests larger institutional investors remain reluctant to pile into digital assets in any meaningful sense, despite the strong returns generated by managers this year.

Alternatives-focused software-as-a-service and data management firm Vidrio Financial surveyed global allocators and LPs - collectively representing more than USD100 billion in alternatives assets under management in the US and Europe - on their crypto investment plans.

The latest monthly ‘Vidrio Views’ survey found that 50 per cent of those quizzed reported zero exposure to any crypto currency or crypto-related currency investments. A further 33 per cent said they had no current exposure but were considering it as an investment option. Just 17 per cent had between 6-10 per cent exposure in their portfolios.

Cryptocurrency-focused hedge fund managers have generated a remarkable 254 per cent return year-to-date, according to Hedge Fund Research data.

HFR’s Cryptocurrency Index - which tracks the performance of a pool of hedge funds trading bitcoin or other digital currencies long and short across a range of strategies including arbitrage, event driven and momentum – scored a near-27 per cent return in August, its fifth double-digit monthly return so far in 2021.

But despite growing interest around crypto-related assets and digital coins, Vidrio said further adoption ultimately hinges on investors “becoming more comfortable and educated about the risks and structure” of crypto’s investment opportunities.

“While the craze of interest for crypto currencies and crypto related investment offerings persists to date, there are no meaningful examples of large institutional investors embracing this new asset class,” Mazen Jabban, Founder and CEO, Vidrio Financial, and Gygmy Gonnot, Managing Director and Head of Research, Vidrio Financial, said in their monthly commentary.

The survey – which included asset managers and insurers, outsourced chief investment officers (OCIOs), and family offices and investment consultants – also explored allocators’ future plans for crypto allocations, with the responses suggesting opinion remains splintered.

Some 17 per cent of investors surveyed intend to make allocations to cryptocurrencies “directly and equally”, while another 17 per cent believes currencies themselves are too volatile, but are mulling investments in crypto-related companies and infrastructure. One-third of those polled – 33 per cent - remain in ‘wait-and-see’ mode for the next 12 months, and another 33 per cent said crypto and crypto-related assets are “too volatile and not an appropriate fit” for their current allocation models.

The findings also show many institutional investors continue to lean heavily on their risk teams ahead of any allocation to crypto assets. 

Quizzed on cryptos’ risk relative to other assets, some 50 per cent of respondents said the risk is too high for their portfolios, while 33 per cent are not overly concerned but are working closely with risk teams to determine the potential risks. Meanwhile, 17 per cent are not concerned, adding crypto and crypto-related assets are in line with the risk levels they have for other asset classes.

The findings come as bitcoin saw a fresh round of volatility this week. The world’s foremost cryptocurrency fell sharply on Monday, dipping below USD45,000 amid a broader sell-off of digital currencies, before rising on the back of a statement by Twitter outlining plans to add bitcoin payments to its Tips feature.

Meanwhile, hedge funds are continuing to build out their crypto capabilities.

Brevan Howard Asset Management, the high-profile global macro hedge fund giant founded by Alan Howard, is significantly ramping up its presence in this sector with the launch of BH Digital, a new division to manage cryptocurrency and digital assets. Earlier this month the firm appointed Colleen Sullivan, CEO and co-founder of CMT Digital, to lead its private and venture investment activities in crypto. In May, the Brevan Howard Master Fund said it would start allocating to cryptocurrencies.

Elsewhere, London-based Nickel Digital Asset Management, headed by ex-Goldman Sachs and JP Morgan portfolio manager Anatoly Crachilov, has seen its assets soar some 260 per cent this year to more than USD250 million. 

The firm has generated gains across its range of cryptocurrency-focused strategies, with its flagship systematic market-neutral Digital Asset Arbitrage Fund in double-digit territory year-to-date.

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Hugh Leask
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Editor, Hedgeweek