Key Takeaways
- • Thirty-two percent of surveyed hedge fund managers see digital assets as the largest alpha-generating opportunity over the next three years, ahead of equities (18 percent) and fixed income (15 percent), according to a SigTech survey.
- • Twenty-three percent of respondents plan to dramatically increase digital asset allocations, and 60 percent plan to increase them slightly.
- • The survey of 100 hedge fund managers managing $194 billion in combined AUM was conducted in Q2 2022, during a sharp crypto sell-off in which Bitcoin fell 58 percent and Ethereum fell more than 69 percent.
- • Roughly a third of hedge funds were investing in digital assets in 2022, up from 20 percent in 2021, per a June PwC and AIMA report; crypto-only hedge funds grew roughly 50 percent over three years.
- • Managers cite higher volatility, immature market structure creating inefficiencies, and less restrictive investment guidelines as drivers of interest.
Summary
Hedge funds are increasingly turning to digital assets despite a severe cryptocurrency downturn in the second quarter of 2022. According to a latest report from SigTech, a quantitative technologies provider, 32 percent of hedge fund managers believe digital assets will offer the largest alpha-generating opportunity over the next three years, ahead of equities at 18 percent and fixed income at 15 percent. Twenty-three percent of managers plan to dramatically increase their allocations to digital assets, while 60 percent plan to increase them slightly.
The SigTech survey covered 100 hedge fund managers with $194 billion in combined assets under management. Half are based in North America, 30 percent in Europe, and 20 percent in Asia Pacific. Thirty-four percent run multistrategy funds and 26 percent focus on equity strategies. The survey was conducted during the second quarter of 2022, the worst quarter for Bitcoin in over a decade, when the most popular cryptocurrency plunged 58 percent from April to June, its worst quarterly result since a 68 percent loss in the third quarter of 2011. Ethereum was down more than 69 percent in the same quarter.
SigTech attributes part of the enthusiasm to crypto's more volatile pricing. Daniel Leveau, vice president of investor solutions at SigTech, noted that hedge funds can deploy derivatives in crypto trading as they do in stock and bond markets, where they significantly outperformed benchmarks amid heightened volatility in the first half of 2022. The report also points to the underdeveloped state of crypto market mechanisms, including centralized and decentralized exchange models. Leveau described the market as "kind of an immature market structure for many of the digital assets, meaning there are inefficiencies [for hedge funds to] explore," adding that mispricings are much easier to find than among S&P 500 stocks.
Hedge fund participation is already substantial. According to a June report by PwC and the Alternative Investment Management Association, about a third of hedge funds were investing in digital assets in 2022, up from 20 percent in 2021. The number of crypto-only hedge funds has grown roughly 50 percent over the past three years, and research cited by Institutional Investor indicates such funds tend to perform on par with Bitcoin but with less downside risk.
Hedge funds' less restrictive investment guidelines also support their interest. Leveau said managers can invest across a much wider universe without concern for deviating from a benchmark, a constraint typically faced by traditional managers. "At the end of the day, that's why hedge funds succeed," he said.
The SigTech survey covered 100 hedge fund managers with $194 billion in combined assets under management. Half are based in North America, 30 percent in Europe, and 20 percent in Asia Pacific. Thirty-four percent run multistrategy funds and 26 percent focus on equity strategies. The survey was conducted during the second quarter of 2022, the worst quarter for Bitcoin in over a decade, when the most popular cryptocurrency plunged 58 percent from April to June, its worst quarterly result since a 68 percent loss in the third quarter of 2011. Ethereum was down more than 69 percent in the same quarter.
SigTech attributes part of the enthusiasm to crypto's more volatile pricing. Daniel Leveau, vice president of investor solutions at SigTech, noted that hedge funds can deploy derivatives in crypto trading as they do in stock and bond markets, where they significantly outperformed benchmarks amid heightened volatility in the first half of 2022. The report also points to the underdeveloped state of crypto market mechanisms, including centralized and decentralized exchange models. Leveau described the market as "kind of an immature market structure for many of the digital assets, meaning there are inefficiencies [for hedge funds to] explore," adding that mispricings are much easier to find than among S&P 500 stocks.
Hedge fund participation is already substantial. According to a June report by PwC and the Alternative Investment Management Association, about a third of hedge funds were investing in digital assets in 2022, up from 20 percent in 2021. The number of crypto-only hedge funds has grown roughly 50 percent over the past three years, and research cited by Institutional Investor indicates such funds tend to perform on par with Bitcoin but with less downside risk.
Hedge funds' less restrictive investment guidelines also support their interest. Leveau said managers can invest across a much wider universe without concern for deviating from a benchmark, a constraint typically faced by traditional managers. "At the end of the day, that's why hedge funds succeed," he said.
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