Hedge funds pile into cryptoassets as FOMO outweighs potential risks

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Crypto has grabbed the attention of hedge funds, as investors eye a bull run in 2023 and 2024 in a sector that has plunged by more than $2tn since last November.

Nearly a third of traditional hedge funds are currently investing in cryptoassets. Two-thirds or 67% of those hedge funds are aiming to deploy more capital into the emerging asset class by the end of 2022, according to areport by The Alternative Investment Management Association.

Sarah Crabb, a financial services partner at law firm Simmons & Simmons, told Financial News that nearly all of her firm’s top 10 hedge fund clients have some exposure to crypto. She said that established hedge fund managers are continuing to diversify into the asset class.

Over 50% of London-based hedge fund managers have already invested or are planning to invest in digital assets, she said.[It is] somewhat surprisingly given recent market events, interest in the asset class remains high. There is also the FOMO factor as managers do not want to miss out on a crypto market rally.

In recent years, hedge fund giantssuch as Ray Dalio and Daniel Loeb have changed their viewson bitcoin and other cryptocurrencies. Dalio, who once expressed his concerns over the sector, said in January said that allocating up to 2% of your portfolio to bitcoin is reasonable.

Hedge fund billionaire Loeb also deep dive into crypto last year, holding an unspecified amount of cryptocurrency with Coinbase.

Hedge funds are looking at crypto as a high-risk asset and the potential risks of these assets are outweighed by the fear of missing out, Jonathan Merry, CEO of CryptoMonday.de, said.

It is a combination of the likelihood that the market has bottomed and in anticipation of the next bull run, which could occur in 2023 or 2024 the date of the next bitcoin halving,Merry added. The so-called halving of the bitcoin takes place every four years, because of the inherent fixed rule within the network governing the cryptocurrency ensuring there will only ever be 21 million bitcoin in circulation.

The crypto winter, which haspersisted since November last year, forced several firms to shut down their operations, including crypto hedge fund Three Arrows Capital, which fell into liquidation in June.

Crypto is one of the forward-looking indicators and given that there has been a lot of forced selling as the result of the collapse of luna and Three Arrows Capital, a lot of people that needed to sell already sold, Nikita Fadeev, partner at Fasanara Capital, said.

Mona El Isa, co-founder at Enzyme, believes that hedge funds are expecting another crypto bull run at some point, but the market is still bottoming out. There are few funds that are positioned well enough to act on opportunities today, El Isa told Financial News.

Some hedge funds scored big on their crypto bets last year. London-based Ruffer Investment Management made a profit of more than$1bnfrom its bitcoin investment in five months, according to a report by The Sunday Times. While billions in profit on crypto bets have notmaterialized for hedge funds over 2022 due to the market dip, some new players have entered the market to drive the adoption of the emerging asset class.

The trend of traditional firms getting into crypto is irreversible, Fadeev added.

To contact the author of this story with feedback or news, email Bilal Jafar

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