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Crypto hedge fund AUM grows, but new launches hinge on bitcoin prices

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Hedge funds trading cryptocurrencies doubled their assets under management last year – but returns remain volatile, with the ability to survive hinging heavily on performance, a new industry survey has found.

The ‘2020 Crypto Hedge Fund Report’, jointly published today by PwC and Elwood Asset Management, a digital assets-focused investment firm, surveyed more than 40 managers running active crypto hedge funds during Q1 2020.

The wide-ranging report – which explores both quantitative issues within the crypto hedge fund sector, including liquidity terms, trading of cryptocurrencies and performance, as well as qualitative themes, such as best practice with respect to custody and governance – indicates a sector gathering momentum, but still subject to volatile and unstable returns.

Research shows there are around 150 active crypto hedge funds, almost two thirds of which launched in the past two years.

The amount of assets under management in cryptocurrency-focused hedge funds grew from USD1 billion in 2018 to more than USD2 billion in 2019.

The percentage of crypto hedge funds running more than USD20 million in assets grew in 2019 from just under a fifth (19 per cent) to more than a third (35 per cent). At the same time, the average AUM double from from USD21.9 million to USD44 million.

The median AUM at fund launch is USD2 million, indicating that funds have generally seen a four-times increase in AUM in 2019.

The report identified four main cryptocurrency hedge fund strategies. Quantitative funds – which include directional, multi-strategy and arbitrage strategies – dominate the crypto hedge fund space, amounting to almost half (48 per cent) of the sector. Discretionary long-only funds account for almost a fifth (19 per cent), followed by discretionary long/short (17 per cent) and multi-strategy (17 per cent).

All generated positive gains last year, with multi-strategy gaining 15 per cent, quant and discretionary long/short up more than 30 per cent, and long-only advancing some 40 per cent on a median basis.

But the sector faces significant survivorship bias, the report found, as the median crypto hedge fund performance rebounded from -46 per cent in 2018 to 74 per cent in 2019.

“This provides very clear evidence that funds that significantly underperformed during the previous year had to shut down,” the report said.

“This is particularly relevant when we consider the small AUM of crypto hedge funds: their average management fees [around 2 per cent and 20 per cent on average] are not enough for them to break even. This can only be achieved with strong performance fees.”

The report added: “While these strategies were able to mitigate the effects of the 2018 crypto bear market, they did not succeed in replicating the upward trend of 2019.”

Most crypto hedge funds trade bitcoin (97 per cent), followed by Ethereum (67 per cent), XRP (38 per cent), Litecoin (38 per cent), bitcoin Cash (31 per cent) and EOS (25 per cent).

Indeed, the study found that crypto fund launches are highly correlated with the price of bitcoin, with the 2018 bitcoin price spike proving a catalyst for more fund launches, while the market slide in late 2019 coincided with a “material decline” in new fund launches. 

Almost 90 per cent of all investors are either family offices or high net worth individuals, with few crypto strategies attracting institutional or pension allocations.

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