Despite a forty-six percent (46%) drop in the crypto hedge funds; PricewaterhouseCoopers (PwC), consulting and auditing firm, reports that institutional buying of cryptocurrency increased steadily in 2018.
The report further clarifies that in 2018, the Assets under Management (AuM) of the crypto hedge funds doubled. The quarter to quarter increase in the median hedge fund is over four and a quarter million dollars ($4.3m).
According to the report, crypto hedge funds were able to double their Assets under Management (AuM) in 2018, with the median crypto hedge fund AuM growing from less than two and a quarter million dollars ($2.1m) in January 2018 to four and a quarter million dollars ($4.3m) at the end of the first quarter of 2019.
These one hundred and fifty (150) crypto hedge funds now have close to one billion dollars ($1b) in assets in total. However, they seem tiny compared to traditional hedge funds where even the smallest funds control more than $1 billion on an average.
Crypto hedge funds still have a long way to go
PwC goes on to mention in the report that the long term viability of the funds is questionable due to the low fees. These unusually low fees are not sufficient to sustain the fund’s operations. That’s because the funds themselves aren’t too big either. For example, even a two percent (2%) management fee on a crypto fund with four million dollars ($4m) in assets, won’t sustain itself with meager annual revenue of $80,000.
That being said, there are large crypto funds where they manage more than fifty million dollars ($50m), which make business sense. Notable examples include Pantera Capital (based in San Francisco) and Polychain Capital.
Its all about quantitative strategies in crypto hedge funds realm
The well-known funds with a good track record have used quantitative strategies to earn profits. They didn’t choose the fundamental crypto concept of investing in novel technologies. Funds like Pantera use the crypto data to create quantitative models that help identify upcoming opportunities in the crypto realm.
In 2018, discretionary and fundamental funds managed to get – sixty-three percent (63%) and – fifty-three percent (53%) returns, respectively. On the other hand, quantitative funds managed to achieve eight percent median return during the same period.
Also, the poor performance of these funds can be attributed to the fact that they cannot go short and remain long only. More and more funds are taking the quantitative route since it offers more profits.
Why institutions stay away from crypto hedge funds?
Two major issues that keep large institutional investors from these hedge funds are the governance and custody issues. Questionable custody methods plague this industry. Second, being the governance issues that change as per geographical locations. Most crypto wallets are multisig that makes the theft-prone. Both these factors limit the big-ticket deals. The dearth of independent directors is another key issue.
With regulations improving across the globe, crypto hedge funds are sure to be a big hit among the larger investors. Hedge funds are new to the crypto industry, and they are sure to flourish in the future. Over the years, sound practices and institutionalization will lead to rapid growth in crypto hedge funds arena.