Hedge Fund Running: Cryptocurrency Changes Are Coming

In recent years, the market size of cryptocurrencies has continued to expand, superimposed on the Russian-Ukrainian geopolitical “black swan” and unprecedented inflation risks, which have quietly changed the attitude of traditional Wall Street players towards cryptocurrencies, and more and more hedge funds have begun to set foot in this field. .

To be clear, a crypto hedge fund refers to an active fund whose purpose is to generate excess returns (so-called “alpha returns”) that are not affected by the overall volatility of the cryptocurrency market, as opposed to passive A stark contrast to cryptocurrency index funds.

As markets become more efficient, cryptocurrencies are favored by hedge funds due to their higher return potential as a highly volatile asset than traditional assets. Some industry insiders believe that the scale of cryptocurrency hedge funds will continue to expand, and cryptocurrencies and hybrid funds will dominate the hedge fund issuance market in 2022, and the cryptocurrency market dominated by retail investors is ushering in changes.

Inflation risk rises

Legendary hedge fund bosses deploy cryptocurrency

According to the 2021 Hedge Fund Industry Report released by the Alternative Investment Management Association (AIMA) in cooperation with PricewaterhouseCoopers, 21% of hedge funds currently invest in digital assets, and the investment amount accounts for an average of 3% of their assets under management. . Additionally, 86% of hedge funds that have already invested in cryptocurrencies plan to increase their investments, while 26% of hedge funds that have not yet said they are in the final stages of planning an investment or executing an investment decision.

According to a PwC report, almost all traditional hedge fund strategies have dabbled in the cryptocurrency space. Currently, there are more than 400 active cryptocurrency hedge funds worldwide and the number is increasing every day.

JPMorgan Chase believes that the inflation risk has rekindled investors’ interest in bitcoin as a hedge asset, and institutional investors have returned to the bitcoin market, perhaps thinking that bitcoin is a better hedge asset than gold.


(Number of newly issued cryptocurrency hedge funds and Bitcoin price movements Source: PricewaterhouseCoopers)

Steven Cohen, founder and CEO of the $22 billion hedge fund Point72, has bluntly said that he has completely switched to the cryptocurrency field; Brevan Howard, the world’s top hedge fund, also announced in January that it has launched a new cryptocurrency that accepts funds from external investors. Currency hedge funds, betting on the price trend of cryptocurrencies such as Bitcoin and Ethereum, while looking for arbitrage opportunities.

Brevan Howard is known for his macro trading. Its co-founder Alan Howard is known as a hedge fund predator. During the period of severe market volatility in 2007 and 2008, he achieved returns of 25% and 20% respectively, far exceeding his peers. 2020 The rate of return is as high as 100%.

Additionally, in addition to the new fund for outside investors, Brevan Howard has formed a new cryptocurrency unit that includes 12 portfolio managers with over $250 million in assets under management. And Howard himself has invested in cryptocurrencies, blockchain and other assets.

Last year, Brevan Howard said that its hedge fund with assets under management of $5.6 billion would start investing in digital assets, with an investment ratio of no more than 1.5%. In 2020, the fund also acquired a 25% stake in One River, an asset manager that owns a cryptocurrency fund.

Paul Tudor Jones, founder and CEO of Tudor Investment, is also increasing his investments in cryptocurrencies. In a world hungry for new safe assets, Bitcoin could play an increasing role, he has told his clients. Jones rose to fame after successfully predicting the 1987 Black Monday crash. He managed a hedge fund that had no losses for 25 consecutive years and was known as the world’s second-largest trader after Soros.

Recently, Citadel, a heavyweight hedge fund with more than $30 billion in assets under management, has also shifted its attitude towards cryptocurrencies. Its CEO Ken Griffin recently admitted that he had been wrong in comparing Bitcoin to a “tulip bubble” and instead called the cryptocurrency one of the best “stories” in finance over the past 15 years, while also stating that he plans to invest in it Bitcoin.

When Griffin’s Citadel Securities first accepted outside investment in January, investors included Sequoia Capital and cryptocurrency investment firm Paradigm. At that time, Matt Huang, co-founder and partner of Paradigm, once said that he expected Citadel Securities to enter new asset classes including cryptocurrencies.

But at a time when the investment enthusiasm of the bigwigs is high, some people continue to take a wait-and-see attitude towards cryptocurrencies. Asset management company Rebeco believes that although bitcoin has similar scarcity to gold, while being easy to trade and portable, compared with gold, bitcoin lacks a similar trading history as a store of value. Henry Neville, an analyst at Man Group, the world’s largest listed hedge fund, believes that Bitcoin has not yet experienced the test of the inflation cycle.

Outperforming stock returns stabilize

Crypto funds gain traction

Data shows that crypto assets outperform traditional risk assets such as stocks during the crisis. For example, the two digital currencies have gained 14.5% and 13.5%, respectively, since the outbreak of the Russia-Ukraine conflict on February 24, while the S&P 500 has gained only 3.2% during that period.

On the other hand, in the long run, the returns of cryptocurrency assets are gradually stabilizing. The Barclay Hedge Crypto Traders Index, which tracks trading by crypto asset managers, fell just 1.5 percent in February, down from 13 percent in January and 10 percent in December, according to March 14 data.

Joe DiPasquale, CEO of BitBull Capital, the world’s first cryptocurrency hedge fund, said the Russian-Ukrainian conflict did not cause panic, and that the firm’s two adoptions were market neutral thanks to the recovery of Bitcoin and Ethereum in February. Strategic hedge funds are still up this year.

Outperforming traditional risk assets and gradually stabilizing returns have led more investors to actively invest in cryptocurrency funds and related companies.

According to asset management firm CoinShares, crypto investment products and funds saw $163 million in institutional inflows in the first two weeks ended March 4, while inflows into blockchain stocks totaled about $15.6 million. Meanwhile, bond funds saw net outflows of $7.8 billion in the week ended March 9, while real estate funds saw outflows of $770 million over the same period, according to fund analytics firm Lipper.

A report by information exchange platform With Intelligence noted that the number of cryptocurrency products entering the development stage increased significantly last year, especially in the fourth quarter, and this trend is expected to continue this year, driven by institutional investor interest. More high-quality products are launched, while cryptocurrencies and hybrid funds will dominate the market for hedge fund offerings this year.

The cryptocurrency VC space is also favored by capital. In the last three weeks of February, venture capital firms invested around $4 billion in the cryptocurrency space, according to a report by data firm Fundstrat. Year-to-date, the cryptocurrency space has attracted an average of between $800 million and about $2 billion in weekly investment. Additionally, new crypto funds have also raised nearly $3 billion in the past two weeks through March 11.

“Crypto-native companies are still raising funds at very high valuations, and many funding rounds are still oversubscribed,” said George Melka, CEO of cryptocurrency brokerage SFOX. He also said that the valuations of cryptocurrency startups are the highest he has ever seen.

Bain Capital Ventures, part of private equity giant Bain Capital, also announced early last week that it would launch a $560 million fund focused on cryptocurrency-related investments.

“Wild West” Taken

Regulatory guidelines under the executive order are becoming clearer

For a long time, the market and industry insiders believed that the cryptocurrency market was like the “Wild West” lacking sufficient regulation, and the executive order signed by US President Biden on March 9 filled this gap. The use of cryptocurrencies for money laundering and other crimes has plagued financial regulators, and the executive order gives them greater oversight powers over the industry.

The executive order requires federal regulators to assess the risks that the roughly $1.75 trillion crypto market could pose to consumers, investors and the macro economy. U.S. Treasury Secretary Janet Yellen said the move would support responsible innovation and bring substantial benefits to the country, consumers and the business community. At the same time, government departments will also pay attention to the risks associated with illicit finance to prevent risks to consumers, investors, the financial system and the economy.

Some participants welcomed the idea of ​​increased government involvement in cryptocurrencies. Inca Digital CEO Adam Zarazinski said the executive order provides an opportunity for “new avenues of financing.” Marcel Kasumovich, head of research at hedge fund One River, believes that the focus on financial stability reflects the government’s intention to bring digital currencies into the mainstream.

Katherine Dowling, general counsel at crypto index fund management firm Bitwise Asset Management, also said that an executive order providing greater legal clarity on government regulation would be “a long-term positive for cryptocurrencies.”

But Hilary Allen, a professor of financial management at American University, cautions against embracing cryptocurrency too hastily. “Cryptocurrencies, while integrated into our financial system, create weak links not only for those who invest in cryptocurrencies, but for everyone involved in our economy,” she said.

In fact, cryptocurrency-based crime hit a new all-time high in 2021. According to a report by blockchain research agency Chainalysis, illicit addresses received $14 billion in a year, up from $7.8 billion in 2020.

“Criminal misuse of cryptocurrencies is a huge barrier to continued adoption, increasing the likelihood of government restrictions and, worst of all, affecting innocent people around the world,” Chainalysis noted.KwGzc1hJkFuqc0HYLkorOJTMB8glcSDwX6o0AJRH.jpeg

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