05.25.2021

Fifth Of Hedge Funds Investing In Digital Assets

  • Total AuM of Crypto Hedge Funds almost doubled in 2020 to reach US$3.8 billion (vs US$2 billion in 2019).
  • Crypto Hedge Funds on average returned 128% in 2020 (vs +30% in 2019).
  • 47% of Traditional Hedge Fund managers surveyed representing US$180 billion of AuM are already invested or looking at investing in crypto.

PwC and Elwood Asset Management (“Elwood”) have published their third annual report examining the global crypto hedge fund landscape. The report is based on data from research in the first quarter of 2021 on crypto hedge funds (“Crypto Hedge Funds”).

This year, the Alternative Investment Management Association (“AIMA”) was invited to partner on this initiative and provide insights into the rising interest in the digital assets industry from non-crypto focused hedge fund managers (“Traditional Hedge Funds”) to provide the most in-depth overview to date of the hedge fund industry’s position on crypto and digital assets.

 

Key Findings on Crypto Hedge Funds:

 Market and performance overview:

  • We estimate that the total AuM of Crypto Hedge Funds globally increased to nearly US$3.8 billion in 2020 from US$2 billion the previous year.
  • The percentage of Crypto Hedge Funds with AuM over US$20 million increased in 2020 from 35%to 46%.
  • The average AuM for this year’s surveyed funds increased from US$12.8 million to US$42.8 million, while the median AuM increased from US$3.8 million to US$15.0 million.
  • The median Crypto Hedge Fund returned +128% in 2020 (vs +30% in 2019)
  • Most Crypto Hedge Funds trade Bitcoin (92%) followed by ETH (67%), LTC (34%), LINK (30%), DOT (28%) and AAVE (27%).
  • The median best performance strategy in 2020 was discretionary long only (+294%) followed by discretionary long-short (+129%), multi-strat (+114%) and quant (+72%).

Location, management and investors:

  • The vast majority of investors in Crypto Hedge Funds are either high-net worth individuals (54%) or family offices (30%).
  • Funds tend to be domiciled in the same jurisdictions as Traditional Hedge Funds, with the top three being the Cayman Islands (34%), the United States (33%) and Gibraltar (9%).
  • The most common location for Crypto Hedge Fund managers is the United States (43%), followed by the United Kingdom (19%) and Hong Kong (11%).

Key Findings on Traditional Hedge Funds:

Investments in Crypto:

  • Around a fifth of Traditional Hedge Funds surveyed representing US$180 billion in AuM are currently investing in digital assets (21%); the average percentage of their total hedge fund AUM invested in digital assets is 3%.
  • 86% of those Traditional Hedge Funds currently investing in digital assets intend to deploy more capital into the asset class by the end of 2021.
  • Around a quarter of Traditional Hedge Funds who are not yet investing in digital assets confirmed that they are in late-stage planning to invest this year or looking to invest (26%).

Barriers to Investments:

  • Regulatory uncertainty is by far the greatest barrier to investing (82%).  Even those who do invest in digital assets cite it as a major challenge (50%). The lack of infrastructure or service provider availability also remains a barrier with custody being the area most in need for improvement.
  • In terms of other reasons to not invest, client reaction/reputational risk is high (77%) as well as digital assets being outside the scope of current investment mandates (68%). Almost two thirds of Traditional Hedge Funds said that they don’t have enough knowledge of digital assets (64%), suggesting the need for more education.
  • Around two thirds of Traditional Hedge Funds said that if the main barriers were to be removed they would either actively accelerate investment in digital assets or potentially change their approach and become more involved (64%).

Commenting on the report, Henri Arslanian, PwC Crypto Leader said:

“We expect inflows into crypto hedge funds to continue to increase over the coming months as more and more institutional investors decide to allocate to this fast growing space. For many institutional investors, an allocation to a crypto hedge fund is the natural first step of their crypto journey as it allows them to observe and learn about the asset class via a vehicle and structure they are familiar and comfortable with.”
Commenting on the report, James Stickland, CEO of Elwood said:

“Although relatively small compared to the passive investment vehicles and venture capital funds, the Crypto Hedge Funds industry continues to develop within the broader digital asset ecosystem. We have seen a dramatically increased pace of digitalisation due to the COVID-19 pandemic, and we hope our annual report provides the greater transparency and education required to further the progress.”
Commenting on the report Jack Inglis, CEO of AIMA said:

“From the findings in this report it’s evident that hedge fund allocations to digital assets continue to gain traction. Diversification and exposure to a new value creation ecosystem are cited as key drivers for investing in digital assets. This is unsurprising given that hedge funds tend to be early adopters, at the forefront of innovation whilst remaining committed to achieving the best performance possible. Further education, regulatory clarity and the evolution of service providers and related market infrastructure could lead to the acceleration of increased investment and further institutionalisation of the industry.”

Source: AIMA

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