Hedge funds are accelerating rapidly in the crypto space. We examine this growing market and its appeals for fund managers worldwide.
With the crypto market doubling in value over the last year alone, it’s no surprise that fund managers around the world are taking notice of this growing financial revolution, despite the recent fluctuations. The appeal is clear: an alternative to the traditional banking system, providing new opportunities to market analysts, willing back new coins or startups with seemingly endless potential.
However, as with any evolving market, there is a level of risk involved. Crypto is still a volatile product, as we’ve seen with the rapid price fluctuations in the first quarter of 2021 alone. This means that even experienced asset management firms are likely to be investing only a small portion of their fund money into this space.
Still, with over $3.6tn assets under management globally, even a small percentage amounts to a healthy crypto investment market. And it’s only continuing to grow, with hedge funds looking to start investing more heavily in Ethereum, Dogecoin, Litecoin and other Bitcoin alternatives in 2021.
So, who’s investing, and what’s the appeal for fund managers?
Hedge funds investing in cryptocurrency
Some of the world’s biggest and most well-known hedge funds are investing in the cryptocurrency market. In April, Brevan Howard — one of the largest funds in Europe — announced its intention to invest, putting 1.5% of its fund in digital assets as an initial step.
The company has been involved in this space for a while, having recently acquired a 25% stake in One River Asset Management, an absolute-return strategy focused asset manager, strongly backed by the traditional financial system.
One River Asset Management recently made one of the largest trades in the history of digital assets, in partnership with Coinbase, proving its long-term confidence in this asset class going forward.
However, they’re not the only ones. This is part of a larger move by institutions, wealth managers and firms like Brevan Howard towards crypto assets, particularly currencies like bitcoin.
Goldman Sachs has indicated that it’s looking to move into blockchain-related assets, and in April Morgan Stanley approved indirect bitcoin investments for a handful of its funds. With two of the world’s biggest investment banks declaring their intentions, it seems that cryptocurrency has definitely hit the mainstream.
Early adopters are continuing to grow as well. Pantera Capital, which launched the first cryptocurrency hedge fund way back in 2013, noted that its bitcoin fund is up over 82,000% in the seven years since its launch. Performance has been improving steadily for this firm, and with its history of investing in early disruptors, it’s likely to keep going strong with its $4.3bn assets under management.
Institutional investors may now be taking notice, but these specialised firms still have an important place in this rapidly expanding space.
Increasing hedge funds for cryptocurrency
In 2019 there were over 150 crypto hedge funds actively managing over one billion dollars in assets. By the third quarter of 2020, there were more than 800 active funds, and this number is steadily increasing, with constantly improving infrastructure encouraging more funds to invest.
Around two-thirds of hedge funds managing crypto launched in 2018 and 2019, with their assets under management more than doubling during these years. In 2021, the appeal is as strong as ever, and early reports by Hedge Fund Research for this year’s overall hedge fund performance indicate one of the strongest year-to-date performances since the 1990s. Advancing in April for the seventh consecutive month, optimism remains high in this asset sphere, which will naturally trickle down into the blockchain fund market.
There’s room for growth
Of course, one of the most revolutionary aspects of crypto trading is its accessibility to individuals as well as to hedge funds and institutional investors. Trading cryptocurrencies like Bitcoin, Ethereum and digitalised physical gold and silver is possible through apps and exchanges tailored to multipurpose use. And with Kinesis, you can merge the best parts of crypto (its skyrocketing value and current financial focus, for example) with the historically popular gold and silver as a stable asset choice.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.