Despite sharp price shocks, the upward momentum in cryptocurrencies and the broader digital asset sector has heralded eye-catching returns for hedge funds over the past 12 months, underlining the asset class’s status as a key area of focus in alternatives.

Roughly a third of hedge fund managers are considering launching a digital assets-focused strategy over the next 12 months, underlining the depth of appetite.

While the volatile nature of cryptocurrencies – coupled with the still-unfolding shape of regulation – has kept some investors on the sidelines, outsized returns offered by digital assets continue to draw in hedge fund managers.

Until recently retail investors were at the forefront of digital asset investments. Since the pandemic, all types of investors, notably institutional investors who were somewhat initially reluctant, are steadily realising the potential of investing in cryptocurrency.

Regulation remains in sharp focus. Digital participants from across the financial markets spectrum are keen to dive in headfirst while others, partly due to a perceived supervisory gap, remain on the sidelines.

Major advances in the way trading and custody infrastructure tackles counterparty and exchange risk in digital assets are helping to assuage investor fears and will help further drive institutionalisation of this market further down the line, industry participants say.

Cryptocurrency investing has not always gone hand-in-hand with ESG. Recent analysis suggests that these two major trends, which loom large over hedge funds and asset managers, are set for a head-on clash.