cryptoknowmics.com
A recent study indicates that traditional hedge funds have started gaining interest in the world of cryptocurrencies. However, they're keeping their investments low, notwithstanding the current crypto surge sweeping the market. Intertrust Group, a Netherlands-based fund administrator, in its survey of 100 hedge funds, found that hedge funds are aiming to scale their crypto exposure significantly. Chief financial officers worldwide predicted that 7.2% of their assets would be held in cryptocurrencies in the next five years. In order of priority, the primary reasons for interest in the crypto space given by traditional hedge funds were: general diversification, exposure to a new value-creation ecosystem, and hedge against inflation.
Strategies by Traditional Funds Investing in Cryptocurrencies
Traditional hedge funds investing in cryptocurrencies use fundamental trading, passive approach, and arbitrage as investment strategies. They also use Bitcoin and other cryptos for staking, lending, and borrowing. An increased number of players and liquidity is evolving the crypto derivatives market. Different exchanges provide highly sophisticated products that allow crypto hedge funds to capitalize on mispricing and arbitrage opportunities. In bull markets, managers compound returns by increasing leverage and taking more extensive exposure to their underlying positions. Hedge funds invest in digital assets through derivatives trading (futures/options) and traditional value strategies – direct/spot investment or passive funds/trusts or ETPs.
Barriers Faced By Traditional Hedge Funds Investing In Cryptocurrencies
Traditional hedge funds face specific barriers while investing in cryptocurrencies, with regulatory uncertainty being the most significant barrier. According to Joe McCarney, the global blockchain assurance leader at EY, the regulatory framework is a substantial hurdle to broader-scale adoption for many investment managers. Other significant barriers include Client reaction or high reputational risk, crypto-assets being outside the scope of their current investment mandates, and lack of sufficient knowledge on digital assets to invest in them. Intertrust’s report also listed custodianship of digital assets, mode of storage, and protection as a primary focus of hedge funds as they move forward with crypto allocations.
Notable Traditional Hedge Funds Investing In Cryptocurrencies
Pantera Capital
Pantera, founded in 2003 by Dan Morehead, a well-known Bitcoin bull, is one of the oldest digital asset investment firms, initially focused on traditional investments geared toward investing in macro trends before switching in 2013. Pantera has several high-profile institutional backers in the conventional space, including Benchmark, Fortress Investment Group, and Ribbit Capital. With the growth and potential of digital assets, Pantera switched focus towards blockchain and cryptocurrency. It invests in venture equity and crypto tokens, with approximately 75% of its investment from institutional investors. As of November 2021, Pantera Capital managed $6.4 billion in blockchain assets.
Andreesen Horowitz (a16z)
Andreessen Horowitz is a Silicon Valley-based venture capital firm with over $10 billion in management across multiple funds that invest in various asset classes from seed to growth stages. A16z’s arrival into the cryptocurrency space was a massive deal in the industry. It is the first time an established investment institution has explicitly advanced into investing specifically in digital assets. Alternate to utilizing active trading methods, a16z employs a more fundamental long-term approach to its investments.
Polychain Capital
Polychain capital was established in 2016 by Olaf Carlson-Wee. It is probably the most significant digital asset fund globally, managing over $1 billion in assets. Polychain invests in digital currencies and early-stage start-ups focused on blockchain technology and cryptocurrencies. With the ability to attract funds from respected venture capitalists in traditional finance, such as Union Square Ventures, Bain, Founders Fund, and Sequoia Capital, Polychain has established itself as a prominent cryptocurrency fund. Polychain centers on troubled projects with solid fundamentals to get ahead of the market.
Digital Currency Group (DGC)
DGC is a well-established fund with over 130 investments in various projects. Barry Silbert founded it in 2015, a renowned pioneer in cryptocurrency start-ups such as Coinbase, Bitpay, and Ripple. The reach of DCG is massive, fronted by its subsidiary, Grayscale, which has an absolute duty to invest in digital currencies. As of 2019, Greyscale announced that it had accumulated an AUM of over $2.7 billion, surpassing its nearest rivals. The majority of its client base are institutional investors, a positive indication of the increasing interest of institutional players in the cryptocurrency industry. Grayscale is the first-ever publicly traded bitcoin investment vehicle called the Bitcoin Investment Trust. DGC became famous after it acquired CoinDesk, the most significant global cryptocurrency, and blockchain-related media publications company.
Blockchain Capital
Blockchain Capital seeks to help entrepreneurs build world-class companies and projects based on blockchain technology. The firm issues capital, domain expertise, partnerships, recruiting, and strategy. Blockchain Capital is an active venture investor that has financed 75+companies and projects since its conception. Conceived in 2013 by Bart Stephens, Bradford Stephens, and Brock Pierce, Blockchain Capital represents one of the oldest investment funds in cryptocurrency. Blockchain Capital is a multi-stage investor investing in publicly traded cryptocurrencies and has equity in early crypto and blockchain projects, financing over 80 companies since its inception.
Author’s thoughts
Elimination of the barriers to crypto investment would allow fund managers to start or speed up their investment in the digital asset space or possibly change their approach and become more involved. There are several traditional hedge funds that are now investing in cryptocurrencies. While putting your money in such crypto hedge funds could be rewarding, it is important to note that hedge funds are high-risk assets. This is because instead of long-term, steady growth, hedge funds are usually looking for quick short-term gains. However, if you decide to invest in one of the traditional hedge funds dealing in cryptocurrencies, make sure that you fully understand the risks that you will be taking.