Crypto hedge funds are booming. A crypto hedge fund is a managed investment fund that offers investors exposure to digital assets without actually owning the asset directly. But should you invest in a crypto hedge fund when you can just buy crypto? In this article we help you with information so you can weigh up your options. We’ll cover what crypto hedge funds are, things you should know about crypto hedge funds, and the top 5 crypto hedge funds by assets under management.
What is a crypto hedge fund?
A crypto hedge fund is a type of investment where investors pool their funds together to invest in cryptocurrency assets. Crypto hedge funds are usually operated by an experienced crypto trader or group of traders who have years of experience trading crypto. The fund manager(s) will use the capital from the crypto hedge fund to buy crypto assets, such as Bitcoin and Ethereum.
Hedge funds are known to employ more aggressive investment strategies than other types of funds (ETFs), differentiating them as an investment vehicle. There are different types of investment strategies from longing, shorting and arbitrage trading to more fundamentals based strategies like relative value or tech analysis. The chosen strategy will impact that risk profile of the fund.
The word “hedge” is used because these funds historically focused on hedging risk by buying and shorting assets concurrently, in a long-short equity strategy. They’re not called hedge funds because they protect investors from all of crypto’s investing risks however.
On top of these trading strategies, crypto hedge funds will often stake, lend and borrow coins and tokens to increase the IRR of the fund.
Crypto hedge funds don’t just hold crypto assets. They can invest in crypto adjacent assets. For example, there are funds that invest in and trade blockchain stocks. These are stocks of companies that provide Blockchain products and services.
Crypto hedge funds are different from traditional hedge funds in that they focus only on digital assets associated with cryptocurrencies.
Crypto hedge funds are booming
According to PwC, there were 150 to 200 crypto hedge funds at last count. These funds have total assets under management (AuM) in the billions.
The number of funds set up correlate directly to the price of Bitcoin which is no surprise. Because Bitcoin is booming, so is interest in these kind of more aggressive funds.
Who is investing in them, and how much?
The funds, by their structure and the way they’re regulated, target already wealthy investors. Because they are seen as ‘risky’, the US Securities Exchange Commission (SEC) limits access to hedge funds to ‘accredited investors’. Accredited investors have a net worth of more than $1 million, not including the value of their home, or annual individual incomes over $200,000.
Basically, if you’re a US citizen but you’re not already rich you can’t invest in in any kind of hedge fund, including a crypto one (but by all means take your cash to Vegas and blow it all on black…).
It follows that around 50% of crypto hedge fund clients are high net worth individuals followed by family offices and ‘funds of funds’. The average investment in crypto hedge funds is $1.1 million.
Crypto hedge funds are traditional investment vehicles. They’re a known quantity to traditional investors and these are the investor types they will continue to attract.
3 things to know about crypto hedge funds, before investing
- Fees – You have to pay them and they’re high. You pay both management fees AND performance fees for the privilege of investing in these funds.
- Management fees – average 2.3%
- Performance fees – average 22.5%. Often increase with a higher IRR.
- Buy-in hurdles – if you don’t have at least $100k you’re NGMI – not gonna make it. You won’t meet the hurdle rate to invest. You also need to be an accredited investor in the US (see below) and prove it, which means paperwork! Meh…
- Redemption gates – you can’t take your investment out whenever you want. There are rules about when and how much of your funds you can access at one time. This, they say, it to prevent pricing impacts from large redemptions. So it’s there to ‘protect’ clients, but it just goes against the grain a little.
Buying crypto hedge funds or owning crypto?
The trade offs
Let’s look at the trade offs and benefits of crypto hedge funds, starting with most important part first – cost and performance.
If funds charge a 2.3% management fee on average plus a 20%+ performance fee, what does the average hedge fund performance look like, versus owning cryptocurrency outright?
According to PwC, the median performance of crypto hedge funds in 2020 across all investment strategy types was 184%. Here’s how that breaks down:
But don’t forget, you’re handing back 20% to 30% of that in fees.
If you had just bought and held Bitcoin your investment would have returned 305% over the same period.
And that’s Bitcoin – the largest large cap crypto of them all. Had you chosen instead to buy and hold a lower cap altcoin, like the Layer 1 protocol Fantom (FTM), your return over 2020 was 1088%.
Here’s something else to consider when it comes to crypto hedge funds. They will invest conservatively for a bunch of reasons; reputation, performance, regulatory obligations etc. In this way, crypto hedge funds are no different from traditional hedge funds.
A recent PwC survey revealed that crypto hedge funds predominantly trade the large cap ‘less risky’ coins that are slower to move and less likely to moon. 92% of crypto hedge funds traded Bitcoin ‘BTC’, followed by Ethereum ‘ETH’ (67%), Litecoin ‘LTC’ (34%), Chainlink‘LINK’ (30%), Polkadot‘DOT’ (28%) and Aave‘AAVE’ (27%).
So what are you trading returns for when you invest in a crypto hedge fund? Exactly what do you get out this kind of investment (if you do meet the buy in hurdle that is).
The benefits
Time & effort saved
For the fees you pay them, fund managers will do the research for you. They will also manage the blockchain transactions for you. You don’t need to learn anything about crypto – how to use on and off-ramps from fiat, how transact on the blockchain, where to store to coins, etc. etc.
Seen as less risky than coin picking
Hedge funds use more aggressive investing strategies than other funds, but crypto hedge funds are still seen as less risky than owning crypto itself. Why is this?
Firstly, the fund managers do the due diligence for you. They research the companies, projects and code so you don’t have to worry about putting your money into something that turns out to be a rug pull or some other scam. Fraud, scams and rug pulls are a realised risk in crypto for many investors.
Secondly comes diversification. A hedge fund uses the money in the fund to buy into multiple coins, tokens and projects. The concept being, your money is diversified to help reduce single asset risk exposure and soften market volatility.
While they will help you avoid some of the risks inherent in investing in crypto (check out our article on this here), crypto hedge funds are still exposed to broader crypto market volatility. Although they actively seek to manage the impacts, it’s more to dilute than avoid them.
No asset custody worries
You might sleep better at night knowing that you are not responsible for keeping your crypto safe from cyber hack yourself. That’s because buying into one of these funds, you won’t really own any. No need for cold storage wallets, private keys, seed phrase storage, or any of that palaver.
Tax advantaged
This is a weird one. We’ve always had trouble with the concept of picking investments specifically for the tax advantages, but it can be a nice by-product. If you’re a US Citizen, hedge funds can qualify to be held in IRA and Roth IRA accounts.
Crypto hedge fund list
With over 150 crypto hedge funds in the market, it’s difficult to nail down exactly which one might be right for you. This is precisely why there’s a whole industry of brokers available to refer you to their crypto hedge fund of choice (for a commission or trailing fee of course!). To help out, here’s a list of crypto hedge funds but by no means is it exhaustive. Some of the better known and large fund managers not on the list include:
- Grayscale Investments
- Pantera Capital
- Galaxy digital
- Invictus Capital and
- Coinshares.
