Assets Under Management of encryption Hedging Funds Surge, Family Offices and High Net Worth Individuals Become Major Investors

A recent survey report revealed the management status of funds from family offices and high-net-worth individuals in the encryption market.

According to the data, the Assets Under Management of hedge funds primarily focused on encryption significantly increased in 2019, jumping from $1 billion at the end of 2018 to $2 billion. Throughout 2019, fully discretionary long-only funds performed the best, with an average return of 42%.

It is worth noting that family offices and high-net-worth individuals are the main sources of funds for these hedge funds, accounting for 48% and 42%, respectively.

An industry expert stated: "Since the outbreak of the COVID-19 pandemic, we have observed that people's interest in encryption has become increasingly widespread."

Surveys show that there are currently about 150 active cryptocurrency hedging funds, with nearly 63% established in 2018 or 2019. The establishment activity of cryptocurrency funds is highly correlated with Bitcoin price trends. The surge in Bitcoin prices in 2018 seems to have acted as a catalyst for the creation of cryptocurrency funds. However, as the cryptocurrency market began to decline at the end of 2019, the number of newly established cryptocurrency funds also significantly decreased.

The report categorizes cryptocurrency hedge funds into four main types: fully discretionary long, fully discretionary long/short, quantitative funds, and multi-strategy funds. Among them, quantitative funds are the most common, accounting for nearly half of the market share. The other three strategies each account for about 17-19% of the market share.

From the perspective of investor composition, family investment institutions and high-net-worth individual investors account for almost 90% of all investors. Surprisingly, pension funds, foundations, and endowments have very low participation in cryptocurrency investments, and the investment proportion of traditional venture capital funds and funds of funds in this area is also relatively small.

The median number of investors in these funds is 27.5, with an average of 58.5. The median average investment size is $300,000, while the average reaches $3.1 million. About two-thirds of crypto hedging funds have investment sizes below $500,000.

In 2019, the global assets under management of cryptocurrency hedging funds were estimated to exceed $2 billion, doubling from $1 billion in 2018. The distribution of assets under management shows a significant Matthew effect, with a few large hedge funds controlling most of the assets, a phenomenon similar to that in the traditional hedge fund industry.

Compared to 2018, the proportion of cryptocurrency hedging funds with Assets Under Management exceeding $20 million rose from 19% in 2018 to 35% in 2019. A higher Assets Under Management can not only attract new investors but also bring in larger investment amounts. However, considering concentration risk, many investors will limit the position size of a single fund to no more than 10% of their total assets.

In terms of performance, the median return of cryptocurrency hedging funds in 2019 increased by 74%, which stands in stark contrast to the average performance of -46% in 2018. Notably, most cryptocurrency hedging funds that performed poorly in 2018 have been forced to close.

By investment strategy classification, the median performance of multi-strategy encryption hedging funds in 2019 was 15%, lower than the quantitative strategy ( 30% ), discretionary long/short strategy ( 33% ), and discretionary long strategy ( 40% ).

Nevertheless, Bitcoin's 92% increase in 2019 still outperformed all encryption hedging funds. The poor performance of these funds may be related to the encryption bear market of 2018, while they also failed to fully capitalize on the market's upward trend in 2019. Overall, these encryption hedging funds acted more as tools to reduce market volatility rather than catalysts for improving performance.

With the further development of the encryption lending market, many trading platforms have begun to offer customers lending and margin trading services, and flash loans and interest rate arbitrage trading are gradually becoming popular. The diversification of the derivatives market and enhanced liquidity have made it easier for encryption hedge funds to hold short positions, thereby executing more complex investment strategies.

The survey shows that nearly half of the respondents' hedge funds hold short positions, with over half using derivatives. About one-third of the encryption hedge funds participate in futures and options trading products. It is expected that in the coming years, as regulated encryption futures products increase, more encryption hedge funds will enter this field.

In terms of leveraged trading, the proportion of encryption hedging funds using leveraged trading rose from 36% in 2019 to 56% in 2020, but the actual active use of leveraged trading was only 19%.

In the future, it is expected that more cryptocurrency hedge funds will be allowed to use leverage in their investment prospectuses, but the growth in this area remains uncertain due to the increased difficulty of obtaining debt financing. Additionally, there may be more investors gaining leveraged exposure through derivative instruments.