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Crypto Hedge Funds Are Growing; Performance Better than Bitcoin

Crypto hedge funds have successfully raised capital throughout 2018 despite a bearish market. Many funds have managed to outperform Bitcoin, but performance differs widely depending on investment strategies. 

Crypto hedge funds are growing in size. According to a recent report published by PwC and Elwood Asset Management, the industry has been “relatively successful” at raising capital despite the bearish market conditions during all of 2018 and early 2019. 

The report was based on data gathered from 100 crypto hedge funds, excluding crypto index funds. Overall, the results of the report draw a picture of a still nascent but quickly maturing industry.

 

Assets under Management: median hedge fund AuM  has grown threefold since January 2018

PwC and Elwood Asset Management estimate that crypto hedge funds collectively hold around $1bn in Assets under Management (AuM). In comparison, the traditional hedge fund industry has more than $3tr under management, according to the US SEC. 

The average crypto hedge fund had an AuM of $21.9m in Q1 2019. Similar to the traditional hedge funds industry, a small number of large funds manage the lion’s share of the total AuM, followed by a long tail of smaller funds. 60% of crypto hedge funds manage less than $10m in assets, and only 10% of funds manage more than $50m. 

Source: PwC & Elwood Asset Management, 2019

Therefore, the average AuM is heavily skewed, and it’s more appropriate to look at the median AuM. Since January 2018, the median crypto hedge fund AuM has grown from $1.2m to $4.3m at the end of Q1 2019.

 

Performance: enormous differences depending on trading strategies 

Looking at performance indicators, there are significant differences throughout the industry. The median crypto hedge fund returned -46%. Considering that Bitcoin – which is the benchmark for most crypto funds – was down 72% in 2018, many funds still managed to generate alpha. 

The report drills down further and distinguishes three types of funds: Fundamental funds, which invest in early stage token projects and digital currencies. Discretionary funds, which run hybrid strategies including long/short, relative value, event-driven, technical analysis, and strategies which are crypto- specific, such as “generalized mining.” And quantitative funds, which focus on market-making, arbitrage, and low latency trading. 

The report finds that the median quantitative fund returned 8% in 2018. Meanwhile, the median fundamental fund returned -53% and the median discretionary fund returned -63% in 2018. 

Source: PwC & Elwood Asset Management, 2019. Note: A beta coefficient close to 1.00 describes a positive correlation to the movement in the price of Bitcoin.

The reason for these enormous gaps in performance is that fundamental and discretionary funds are closely linked to the performance of Bitcoin, whereas quantitative strategies like arbitrage trading result in lower exposure to the excess volatility of digital currencies in the specified period.

 

Conclusion: a positive outlook for the industry 

The report has multiple indications: Firstly, the crypto hedge funds industry is still relatively small in size but it is growing fast. PwC Hong Kong director Henri Arslanian said, “The crypto hedge fund industry today is probably where the traditional hedge fund industry was in the early 1990s. We expect the industry to go through a rapid period of institutionalization and implementation of sound practices over the coming years.”

Secondly, crypto markets are an ideal playing field for actively managed funds. Taking Bitcoin as the benchmark, many funds included in the report were able to outperform the market.

Thirdly, the report reveals that quantitative trading methods such as arbitrage or low latency trading are some of the most effective tools in crypto markets. While it makes economic sense to execute hybrid strategies consisting of multiple approaches, the data demonstrate that funds including quantitative trading methods fare better in crypto markets.