Hedge funds ride exceptional returns after crypto wave

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Cryptocurrency hedge funds gained nearly 24% in August, as sharp swings in digital asset prices helped them outperform investors in sleepy equity and currency markets.

The sustained pace of gains means funds focused on bitcoin and other digital assets have returned 145% this year, according to data from Eurekahedge.

Crypto remains a relatively small niche in the hedge fund industry, with most focusing on bonds, commodities, and other more established asset classes. But the uncontrollable returns available in digital assets are attracting the attention of funds looking for opportunities that are often lacking elsewhere.

“Crypto has two characteristics that make the performance potential important for participating hedge funds: volatility and inefficiency,” said Francesco Filia, Managing Director of Fasanara Capital, a hedge fund with more than 1.5 billion dollars. euros of assets, part of which is allocated to cryptocurrencies.

“The combination of the two allows an outperformance of traditional asset classes. “

June marked the only setback for crypto funds this year when they lost 10%. They gained nearly 7% in May, even though the price of bitcoin has halved from record highs. The record year follows the return of digital asset specialists to over 200% in 2020.

The strong returns contrast with the 0.59 percent returned in August by hedge funds specializing in currency trading and the 0.8 percent produced by funds that trade in stocks, according to Eurekahedge.

Since the start of the year, the price of bitcoin, the most widely used cryptocurrency, has fluctuated enormously. It started in 2021 at almost $ 29,000 before reaching a series of records. In May, bitcoin traded above $ 63,000 before collapsing below $ 30,000. The digital coin is currently trading at $ 46,017.

These fluctuations have provided traders with many opportunities to place bets. In contrast, currency and equity markets remained calm as low interest rates in major economies stifled large price movements.

The outsized moves in digital assets have caught the attention of a growing number of large traditional hedge funds, which have taken tentative steps to become active in the crypto markets. On Monday, Brevan Howard, one of the largest global macro hedge funds in the world, announced that it will start a digital business to explore opportunities in cryptocurrencies.

“Two years ago, most of the big hedge funds stayed away from crypto because they worried about the reaction of their existing investors. Now these same hedge funds fear that if they don’t at least explore crypto, they will be criticized by their existing investors, ”said Henri Arslanian, crypto manager at PwC in Hong Kong.

But making money in the cryptocurrency markets has become increasingly difficult, with many native digital asset funds ditching the price of bitcoin to increase towards arbitrage and market neutrality strategies in order to achieve juicy profits.

Data compiled by James Butterfill, an investment strategist at digital asset manager Coinshares, showed that there are still three times more passive funds than actively managed strategies, but the latter have held up better in terms of return.

“Crypto arbitrage opportunities are particularly attractive because they avoid the high volatility and uncertainty of crypto-directional strategies,” Filia said.

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