Hedge funds are aggressively increasing their exposure to cryptocurrencies in a move that experts attribute to clearer regulations around digital assets and the launch of spot cryptocurrency exchange-traded funds (ETFs) in the US and Asia. A new survey by the Alternative Investment Management Association (AIMA) and PwC reveals that nearly half (47%) of hedge funds focused on traditional asset classes now have exposure to cryptocurrencies. This marks a significant rise from 29% in 2023 and 37% in 2022.
Additionally, the report notes that all traditional hedge funds currently involved with cryptocurrencies plan to either maintain or increase their positions. None indicated plans to reduce their exposure. 67% of these funds intend to keep their crypto investments steady, while the remaining 33% expect to increase their exposure in the near future, the report stated.
“The findings from this year’s report indicate a steady recovery in confidence over the past year,” said James Delaney, managing director of asset management regulation at AIMA. “It’s really the regulatory clarity that we started to see globally. That clarity is definitely boosting confidence in the asset class.”
Despite the surge in interest in digital assets, some hedge-fund managers remain on the sidelines, with 76% of those not currently invested in cryptocurrencies indicating they are unlikely to change their stance in the next three years, up from 54% in 2023, according to the survey. A primary reason cited is the exclusion of digital assets from investment mandates.
In terms of the methodology, the survey involved close to 100 hedge funds with an aggregate $124.5B in assets under management. 42% of the funds surveyed invest in traditional assets and the rest were focused on crypto (more than 50% portfolio exposure to crypto). The survey was conducted in the second quarter, soon after Bitcoin hit its all-time high in March.
Stablecoins Are Key
In terms of the strategies that hedge funds are employing to gain exposure to cryptocurrencies, the report notes that 58% of these funds traded derivatives, while 25% traded tokens in the spot market. Notably, while the use of derivatives has increased, spot market trading has dropped by more than 50% compared to 2023.
Stablecoins are another prevalent method of gaining market access, with 78% of all hedge funds investing in the asset class using this form of digital asset. The primary reason hedge funds use them is as an alternative to fiat when entering and exiting transactions.
Usman Ahmad, Co-Founder and CEO, Zodia Markets, commented on this finding, saying: “Stablecoins are the effective currency of the digital asset ecosystem and an enabler for the future of finance. This has been reinforced by the finding that 78% of hedge funds investing in digital assets are using stablecoins.”
“This is in line with our experience in the market where the speed and efficiency when moving between transactions, funds or to investors is a critical differentiator, especially when viewed through the lens of capital efficiency.”
Meeting Institutional Demand
Another key finding from the report is the growing institutional demand for cryptocurrencies. “Respondents reported a rising interest in digital assets from institutional investors, with two-thirds of all hedge fund managers surveyed noting increased interest,” the report states.
When analyzed by hedge fund type, notable differences emerge. A significant 85% of digital asset hedge funds – those whose exposure to cryptocurrency exceeds 50% of their portfolio’s value – have reported increased interest from institutional investors, compared to just 43% of traditional hedge funds.
Edward Chin, co-founder of Parataxis Capital Management, an investment firm focused on digital assets, argues that the prospect of enhanced returns is one of the main reasons why hedge funds and institutional investors are increasingly warming up to cryptocurrencies.
“The application of traditional investment strategies can generate much higher returns in crypto given the market is less efficient,” he told Bloomberg.
“Simple market-neutral arbitrage trading strategies that generate mid to high-single digits returns in traditional asset markets can yield high 20% to low 30% type returns,” he said.
He pointed out that one major challenge for hedge funds and institutional investors, however, is deploying large amounts of capital in a market that remains significantly smaller than traditional asset classes.
Big Names Scoop Up Bitcoin
The launch of spot Bitcoin ETFs has been pivotal in convincing many hedge funds to increase their exposure to cryptocurrencies. Since the SEC approved spot Bitcoin ETFs in January, total trading volume across all issuers has exceeded $350 billion, averaging nearly $2 billion per day, AIMA and PwC note in their report. BlackRock’s IBIT ETF has notably become the first ETF to reach $10 billion in assets in less than a quarter, achieving this milestone in just 49 days.
“The Bitcoin ETF was the most successful ETF launch in over 30 years of data and 5,000+ ETF launches. This statistic alone should make any allocator stop and reflect.” said Henri Arslanian, Co-Founder, Nine Blocks Capital Management
According to crypto firm River, 52% of top U.S. hedge funds now own Bitcoin ETFs. This includes major players such as Millennium Management, Renaissance Technologies, D.E. Shaw, Elliott Investment Management, and Two Sigma Investments.
Millennium Management’s Q1 filings revealed that it held over $2 billion worth of shares in spot Bitcoin ETFs, including $844 million in BlackRock’s offering and $806 million in Fidelity’s fund. The New York-based firm has around $68bn in assets and is one of the most high profile backers of Bitcoin in the hedge fund industry.
Similarly, hedge fund billionaire Paul Tudor Jones, the founder and chief investment officer of Tudor Investment, has been a big long-time supporter of bitcoin. Back in 2021 in an interview with CNBC, he noted that investing in crypto could be a good hedge against rising inflation.
Another major backer of Bitcoin is BlackRock CEO and Chairman Larry Fink. During the company’s third-quarter earnings report, Fink emphasized that Bitcoin has evolved into its own asset class. “We believe bitcoin is an asset class in itself. It is an alternative to other commodities like gold” he noted, adding that the firm’s bitcoin ETF had reached $23 billion in inflows.
It’s not just Bitcoin and other cryptocurrencies that are attracting increased investments. Investors are also seeking exposure to crypto firms. For instance, billionaire investor Steve Cohen has been investing in crypto companies through Point72’s venture capital arm since 2021. The firm made its first crypto bet in August 2021 by investing in the crypto analytics platform Messari. Since then, Point72 Ventures has invested in several crypto startups, including digital asset trading platform 24 Exchange and D2X.
Author: Acutel
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