Fund Fire: Crypto Funds Post Triple Digit Returns, But Institutions Wait
September 2021 - Crypto
Cryptocurrency hedge funds are posting some of the industry’s highest returns this year, topping triple digits, as well-known managers dive further into the space to build out a presence. And while institutional investors have remained largely on the sidelines, some industry participants expect that to slowly begin to change this year.
Cryptocurrency-focused funds are still a small slice of the $4 trillion hedge fund universe, but their returns through August have been stratospheric, with Hedge Fund Research’s cryptocurrency index up 253.42% and its blockchain composite index up 234.38%. The indices count 30 constituents, a spokesperson confirmed. Eurekahedge’s cryptocurrency index was up 137% through the same period.
“The evolution of the use cases of blockchain tech” are driving the performance, along with new users, a positive supply-demand dynamic in the space and macro tailwinds due to economic policies responding to the pandemic, said Mark Yusko, CEO and CIO at Morgan Creek Capital Management, which runs a hedge fund in the digital asset space as well as venture funds.
And more hedge funds are stepping in. “You’re seeing people we all know and respect saying, ‘Wait there’s something here,’” Yusko said, pointing to prominent hedge fund executives such as Paul Tudor Jones and Alan Howard. “The intersection between the old world of hedge funds and this new technological innovation is really becoming robust.”
Among the latest moves, Brevan Howard Asset Management earlier this month launched a new division, BH Digital, to manage cryptocurrency and digital asset investments, hiring Colleen Sullivan to develop the firm’s effort in the space.
And new products and indices are also coming online.
California-based Cambrian Asset Management, a $200 million cryptocurrency hedge fund manager, announced it will offer two actively managed trusts tied to the Bitcoin and Ethereum cryptocurrencies, which unlike its hedge fund will not go short, said Tony Fenner-Leitao, president of the firm.
“There definitely has been a shift,” he said. “For anyone that knows what the dialogue with an institutional universe is, it takes a reasonable amount of time to get institutional investors comfortable.”
But the segment also will experience growing pains. Any investor needs to be cognizant of the fact that cryptocurrency markets can face huge drawdowns and be willing to experience it or find ways to mitigate it, said Martin Green, CEO and co-CIO at Cambrian.
More managers appear to be ready for the challenge. While venture capitalists came into the space early, more hedge funds are coming in now, he added.
“What you’ve seen in the last year are macro funds and different types of funds getting involved on the liquid side of things where it’s Bitcoin or Ethereum… You might start to see tech-oriented hedge funds and tech-oriented mutual funds start to make allocations because no one can afford to have zero exposure to the birth of a new computing platform,” Green said.
Other market infrastructure is also taking shape. Wilshire and CryptoCompare launched the FT Wilshire Digital Asset Index Series earlier this month, bringing together a due diligence backbone needed to focus on the pricing from cryptocurrency exchanges. The index is the first in a set, said Martin Howard, senior v.p. and digital asset market specialist at Wilshire.