• Sun. Aug 14th, 2022

Are cryptocurrencies on their last legs? Hedge fund managers certainly don’t think so.

ByHazel R. Lang

Jul 12, 2022

Hedge funds are increasingly turning their attention to digital assets, after witnessing a cryptocurrency bloodbath in the second quarter.

Thirty-two percent of hedge fund managers believe digital assets will offer the greatest opportunity for alpha generation over the next three years, outpacing equities (18%) and fixed income securities (15%), according to the latest report from SigTech, a quantitative technology provider study. Twenty-three percent of hedge fund managers plan to significantly increase their allocations to digital assets, while 60 percent plan to increase slightly.

SigTech based the findings on a survey of 100 hedge fund managers with $194 billion in combined assets under management. Half of the managers are based in North America, 30% in Europe and the remaining 20% ​​in the Asia-Pacific region. 34% of participants are multi-strategy funds and 26% focus on equity strategies.

The survey was conducted in the second quarter of 2022, the worst trimester for Bitcoin in over a decade. The most popular cryptocurrency fell 58% from April to June, the worst quarterly result since losing 68% in the third quarter of 2011. Ethereum also fell more than 69% in the second quarter.

According to Daniel Leveau, vice president of investor solutions at SigTech, one reason for hedge fund managers’ enthusiasm for digital assets is the trend towards more volatile prices. Hedge funds can deploy a variety of derivatives in crypto trading, just as they do in traditional stock and bond markets, where they significantly outperformed benchmarks amid heightened volatility in the first half of 2022.

Additionally, hedge funds also favor digital assets for “the underdevelopment of their underlying market mechanisms, such as centralized and decentralized exchange models,” according to the SigTech report. Leveau added, “It’s still kind of an immature market structure for many digital assets, which means there are inefficiencies. [for hedge funds to] explore.” Compared to S&P 500 stocks, pricing errors are much easier to find in the crypto space, he said.

About a third of all hedge funds have already invested in digital assets this year, up from 20% in 2021, according to a June report from PwC and the Alternative Investment Management Association. The number of hedge funds that invest exclusively in crypto – so-called “crypto hedge funds” – has increased by around 50% over the past three years. Research shows that these hedge funds tend to operate on par with Bitcoin but with less downside risk because Institutional investor Previously reported.

The fact that hedge funds have less restrictive investment guidelines has also fueled their interest in digital assets. According to Leveau, hedge fund managers can invest in a much broader universe without worrying about their deviation from the benchmark, a concern usually reserved for traditional managers. “At the end of the day, that’s why hedge funds succeed,” Leveau said. “[They’re] not too limited in terms of investment guidelines [they need] follow.”


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