Hedge funds focused on cryptocurrencies are on a hot streak, having managed to navigate choppy markets much better than peers focused on more mainstream assets such as stocks and bonds.
Crypto fund managers have returned more than 50 per cent over the seven months to the end of July, compared with the low single-digit gains that hedge funds generated across traditional classes of assets, according to data provider Eurekahedge. Last year crypto hedge funds gained 16 per cent, again outshining mainstream hedge funds, which were up 9 per cent.
The pick-up in profits comes after a rally in bitcoin, now up 60 per cent for the year against the US dollar and up 131 per cent from a trough in March, that has benefited buy-and-hold investors.
Investors said collapsing interest rates in the US and vast bond-buying programmes by central banks, which have driven down government bond yields, have increased the appeal of digital assets such as bitcoin. High stock prices, too, are keeping the pressure on dividend yields.
“There is no yield on crypto, but look at it this way: the floor in bitcoin is zero whereas in many traditional markets we now have negative rates and yields,” said Max Boonen, co-founder of crypto trading company B2C2.
In the early days of crypto trading, investors tried to profit by exploiting price discrepancies on the numerous exchanges where bitcoin and other cryptocurrencies were traded. Such arbitrage opportunities have faded as the market has grown and prices have moved closer in line, according to Michael Bucella, a partner at BlockTower Capital.
“The market has become much bigger and more mature,” said Mr Boonen, adding that strategies that work well in traditional asset classes — such as relying on algorithms tracking momentum to trade foreign exchange — can now work just as well for bitcoin. As much as $200m worth of cryptocurrency options are traded on the largest derivatives exchange daily, up from $20m last year, said Mr Bucella.
Investing in cryptocurrencies remains fraught with regulatory risks, while high levels of volatility can be a deterrent. But the prospect of strong returns over longer periods has been a powerful draw to investors, said Michael Sonnenshein, managing director at Grayscale Investments, a crypto specialist with $5.7bn of assets.
In the second quarter of the year, Grayscale attracted $900m of inflows — three times as much as in the whole of 2019.
“Overwhelmingly the inflows are coming from major hedge funds,” said Mr Sonnenshein. “Conversations are being driven by zero interest rates, which is eroding the value of fiat currencies.”
Mr Boonen, a former interest rates trader at Goldman Sachs, said that in the past two months he has received approaches from “blue-chip” names asking him to run a crypto-dedicated fund for them.
“A number of very large traditional hedge funds are active in crypto, even if they don’t necessarily talk about it,” said BlockTower’s Mr Bucella.
Some quantitative investors that benefit from volatility in digital assets have also had a solid year, despite a relatively calm market since what one fund manager described as a “bloodbath” in March, at the height of fears over the effects of coronavirus.
“Ultimately what we want to do is make a lot of money — irrespective of which way the prices are going,” said Tony Fenner-Leitao, president of $25m-in-assets Cambrian Asset Management.
His crypto-focused quantitative fund is up 49 per cent so far this year.