Nearly half of hedge funds focused on traditional asset classes are now invested in cryptocurrencies, as increased regulatory transparency and the launch of U.S. and Asian exchange-traded funds (ETFs) attract more investors to the market, a new survey shows.
The Global Crypto Hedge Fund Report released last week by the Alternative Investment Management Association (AIMA) and PwC showed that 47% of hedge funds trading in traditional markets hold digital assets, up from 29% in 2023 and 37% in 2022. The survey found that among funds already investing in digital assets, 67% plan to maintain the same level of capital in the cryptocurrency space, while the remaining funds plan to increase their investments by the end of 2024.
While many hedge funds initially entered the cryptocurrency market by trading tokens on the spot market, they are now increasingly deploying more sophisticated strategies. The report shows that among funds involved in cryptocurrencies, 58% will trade derivatives in 2024, up from 38% in 2023, while funds trading in spot markets fell to 25% this year after peaking at 69% last year.
James Delaney, AIMA’s managing director for asset management regulation, said: “The results of this year’s report show that confidence has steadily returned over the past year. We are starting to see regulatory clarity around the world. This clarity has undoubtedly boosted investor confidence in this asset class.”
Due to wild price fluctuations, cryptocurrencies often offer profitable trading opportunities for funds willing to take risks.
Edward Chin, co-founder of digital asset investment firm Parataxis Capital Management, said: "Given the inefficiency of the market, adopting traditional investment strategies can generate higher returns in the cryptocurrency space." He said: "In traditional asset markets, simple market-neutral arbitrage trading strategies can generate mid-to-high single-digit returns, but in cryptocurrency markets returns can be as high as 20% to 30%." He added that deploying large amounts of capital in a market that is still much smaller than traditional asset classes is a challenge.
And the opportunities aren’t limited to crypto tokens themselves. For example, after the 2022 bear market, digital asset company debt may become attractive. Media reported in July that hedge funds including Diameter Capital Partners, Canyon Partners and Farallon Capital Management acquired $874.5 million in debt owed by bankrupt crypto exchange FTX to lender BlockFi.
Still, some hedge fund managers are taking a wait-and-see approach. The survey showed that 76% of fund managers who are not currently invested in such assets said they were unlikely to change their minds in the next three years, up from 54% in 2023. Excluding digital assets from investment mandates is the main reason.
The survey found that two-thirds of traditional hedge funds do not plan to include Bitcoin ETFs in their current digital asset strategies.
Of the 100 hedge funds that participated in the survey, 42% were funds investing in traditional assets, while the remainder were focused on cryptocurrencies. The survey was conducted during the second quarter, when Bitcoin hit an all-time high in March. Bitcoin currently stands at $64,000 per coin, which is still about 10% lower than its historical high.