Cryptocurrency: Next hedge fund asset-class leader?

According to industry estimates, 150 crypto hedge funds were managing $1 billion in assets in 2019. These numbers grew to more than 800 funds with almost $4 billion in assets under management by the end of 2020. The AUM allocated to cryptocurrency more than doubled again, to $9.3 billion, at the end of 2021, according to figures from the independent consultancy Finadium.

Given this rapid rise, allocations to this growing asset sector are bound to increase.

On one fact cryptocurrency’s believers and skeptics can agree: It is probably the most volatile of all asset classes. Some even question whether crypto is an asset class. This volatility, however, has been a boon to hedge funds; the bull market in crypto saw the price of bitcoin, the most well-known and widely held cryptocurrency, rise more than 700% in global trading revenue in 2021.

Regardless of whether crypto is an asset class, its performance will get your attention!

As crypto markets have begun to mature, especially since offerings of bitcoin futures contracts – and more recently, options on bitcoin futures – have begun to trade on various commodity exchanges, hedge funds can now engage in more sophisticated trading and hedging strategies rather than just a simple buy-hold structure. Active managers using systemic long-short strategies can potentially capture alpha in both bull and bear markets.

Rest assured, just as in all asset classes, when the bull gets tired, the bear comes out of hibernation.

The strong performance in the crypto space naturally has not gone unnoticed by professional and institutional investors. The early days of crypto investing were mainly dominated by private investors and traders. Since early 2020, a large influx of professionals has come into the space. According to a survey done by PwC, fully 63% of the largest 150 global crypto hedge funds have been launched since 2019. Almost half of all crypto funds use a self-described quantitative strategy; the remaining 50% are divided between long only, long-short and multistrategy. In terms of performance, while all strategies have generated substantial alpha in this recent bull market, only quant has been able to deliver consistent alpha in up and down markets.

Investors Paul Tudor Jones and Stanley Druckenmiller have called bitcoin “a store of value” and “capable of outperforming gold as a store of value,” respectively. When mainstream, successful money managers such as these become believers, other institutional and professional investors are likely to follow.  For those who are smitten with celebrity, take note that rapper Jay-Z has launched a bitcoin development fund along with Twitter CEO Jack Dorsey.

For the crypto market to continue its growth will require an ever-increasing amount of faith in the financial institutions that provide crypto-related services. People must have faith in their institutions for society to operate effectively. Today, unfortunately, many people—especially young people— have little faith in the older, established financial institutions. This fact was clearly demonstrated in the tug of war between Wall Street and Main Street that resulted in the “short squeeze” phenomenon with GameStop in January and February 2021.

The GameStop episode shows that younger investors are increasingly willing to begin flexing their investing muscles. If one takes into consideration the trillions of dollars of wealth that will be transferred from baby boomers after their retirement to their tech-savvy offspring, one begins to appreciate the potential for all things digital. Younger investors want to trade using their smartphones on a 24/7 basis that cryptocurrencies already embrace.

The opportunity to manage a portion of that wealth is helping to drive the growth and popularity of crypto hedge funds.

This article was originally published in the March 28, 2022 issue of Crain’s New York Business.


John Zoraian John Zoraian is a Principal in Grassi’s Financial Services practice, where he provides expert fund administration, compliance and advisory services to hedge and private equity funds, funds of funds, master-feeders, investment advisors, broker-dealers, family offices, fintech entities and more. John draws from more than 35 years of experience in the hedge fund business. Prior to joining Grassi, he established S&Z Fund Services, a division... Read full bio

Categories: Advisory