Three Takeaways and Future Implications
“This report provides an overview of the global crypto hedge fund market and seeks to identify key trends that are relevant to industry participants, investors, and service providers.”
An Overview of The State of Digital Asset Funds
It has been a busy month in digital assets. The size of the digital asset market currently sits around $900 billion as of writing, down from a high of nearly $3 trillion last November.
Amid the recent volatility, PwC’s “4th Annual Global Crypto Hedge Fund Report 2022” shows how hedge funds quickly evolved during 2021 to keep pace with the digital asset landscape and the new collection of tokens, investment vehicles, and innovations. The report distinguishes between crypto specialist funds and traditional funds.
We’ll highlight key trends and dynamics from the report as well as the implications for what we might see in next year’s report.
Crypto became an important element of hedge fund portfolios last year. Crypto-specific funds grew 150% on average in 2021, which caught the attention of traditional funds, who dipped a (slightly bigger) toe into the sector. Of the investors still on the sideline, 83% cited regulatory uncertainty as the main reason.
“With the hopes of further regulatory clarity, both Crypto Specialist and Traditional Hedge Funds are bullish about the long term future of Digital Assets and their value.”
Three Key Takeaways
The Rise of Market Neutral
There are six strategies employed by crypto hedge funds. “Market Neutral” is a new and common strategy, employed by 30% of crypto funds surveyed. At FirstWatch we have spoken to more and more market-neutral funds using lending, yield farming, and market-making arbitrage to deliver consistent profits. Discretionary Long Only is the third-most common, holding liquid tokens and targeted towards investors with a long investment horizon. Second-most common are Quantitative Long/Short funds. Discretionary Long Only funds outperformed all strategies on average, with returns of 420% — understandable in a year of a bull market.
New Entrants from both traditional and crypto funds
One in three traditional funds is investing in digital assets, compared to one in five last year. The average portion of assets under management (AuM) for the funds invested is 4%.
For crypto-specific funds, high-net-worth individuals and family offices make up a majority of the investor composition. However, one fund noted the fund’s largest investor is an endowment, and pension fund investors were also noted investors. Endowments and pension funds represent entities with long time horizons who have a small but growing appetite for crypto investments.
Asset Diversification
Both crypto and traditional funds are diversifying. Opportunities and use-cases are expanding and funds have shown flexibility in two ways:
Crypto funds are diversifying the tokens they trade. Only 29% of funds reported that half of the daily trading volume is in BTC, a drop from 56% last year. (Luna was the fifth-most traded asset in 2021, prior to its collapse in May 2022.)
More than half of traditional firms invested in digital assets cite “General Diversification” as the primary reason. Only 18% cited “Long Term Outperformance.” As traditional funds saw the opportunities of 2021, many made small, strategic portfolio allocations to gain exposure versus long-term belief.
Future Implications
The April 2022 survey had a vastly different market sentiment than the bearishness of today. A total of 42% of fund managers predicted the price of Bitcoin to end 2022 in the range of $75k-$100k. And 0% predicted a total crypto market cap of less than $1 trillion at the end of 2022, where it currently sits. The data makes it glaringly clear how quickly market sentiment has shifted amid the global macro uncertainty and fear of recession. We can’t know how recent events would impact responses, but if crypto winter has settled in, survivorship bias could play a role in next year’s survey, as some of the funds may be forced to close in the event of a prolonged crypto winter.
The crypto market is maturing. The average asset management experience and average digital asset experience of crypto fund managers have both risen significantly over the past three years; two custodian service providers have risen to the top of the market; derivatives markets continue to grow.
But the asset class has growing pains to get through, especially around regulation and tax clarity. Some of this may be addressed in the new Responsible Financial Innovation Act, but there is no clear timeline on when that will get passed. Many funds not yet exposed have no plans to gain exposure until these obstacles are settled. Both crypto and traditional funds will have their sights set on how the regulatory challenges ahead play out.
Crypto Fund Facts
82% of funds use an independent crypto custodian
One in three traditional funds are investing in digital assets, compared to one in five last year.
The median fund fees are a 2% management fee and 20% performance fee, both consistent since 2019.
Over 70% of funds use USDC, the highest rate of any stablecoin — followed closely by USDT.
Resources:
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG) and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.
Disclaimer: None of the above is investment advice. This blog is published for entertainment and informational purposes only. The ideas expressed are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. Nothing on this blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction, or investment strategy is suitable for any specific person. You should not use this blog to make financial decisions. We highly recommended you seek professional advice from someone who is authorized to provide investment advice. You should always do your own research before investing in cryptocurrencies. It is a volatile market.