In the blog post, we’re digging into a couple of excellent surveys to understand how invested Hedge Funds are in digital assets such as Bitcoin and how much that investment may increase in the coming years. Our first survey found that traditional hedge funds are willing to increase their exposure in Bitcoin and other cryptocurrency markets over the next five years; this is a gated survey conducted by Intertrust Global.
Intertrust Global is an international trust and corporate management company; they polled the chief financial officers of 100 hedge funds globally about their intention to purchase crypto assets. About 98% of them responded that they expect their hedge funds to have invested 7.2% of their assets in cryptocurrencies by 2026.
One of the major emerging trends that we feel Intertrust Global and several of the other research pieces that reviewed didn’t address the growth of the thousands of Altcoins and the exchanges that handle Altcoin transactions and the blockchain platforms that ensure trust. At Ryan Eyes, our Director of Operations suggests that Cardano, Tether, XRP or Ripple, Monero, Stellar, Solana, and Polka Dot or Dot Network are names to watch in the very near term. As a matter of fact, in our next blog post titled “Hedge Funds are Diving into the Cryptocurrency Chase – Part 2” we will specifically address the surge in Altcoin investment.
Ok, back to our research into Crypto investment by Hedge Funds. In a second survey released earlier this year, the research found that just under half of traditional hedge fund managers are investing or considering investing in cryptocurrencies. The Alternative Investment Management Association (AIMA) found in partnership with PWC and Elwood Asset Management, surveyed 39 hedge funds in the first quarter this year with a total of $180 billion in assets under management.
The survey found that 47% of traditional hedge funds have entered or plan to enter the crypto market, with 21% currently investing in digital assets and 26% in the late-stage planning of investing. Of the hedge funds already invested, 86% also intend to deploy additional capital into the asset class by the end of this year.
A report by AIMA, PWC, and Elwood AM found that 47% of traditional hedge funds were investing or considering investing in cryptocurrencies.
The report also found that the total assets under management for crypto-based hedge funds had almost doubled from $2 billion in 2019 to nearly $3.8 billion in 2020. Around two-thirds of respondents said that if the main barriers were to be removed, they would either actively accelerate investment in digital assets (18%), or potentially change their approach and become more involved (46%). While 32% of respondents stated that the removal of barriers would still probably not impact their current approach given investing in digital assets remains outside their mandate.
Key Findings of the 3rd Annual Global Crypto Hedge Fund Report 2021
- Just over one-fifth of hedge funds are currently investing in digital assets (21%) with on average 3% of their total hedge fund AuM invested.
- Around a quarter of hedge fund managers who are not yet investing in digital assets confirmed that they are in late-stage planning to invest or looking to invest (26%).
- 86% of those hedge funds intend to deploy more capital into the asset class by the end of 2021.
- In terms of the main obstacles to investing, regulatory uncertainty is by far the greatest barrier (82%). Even those who do invest in digital assets cite it as a major challenge (50%). Client reaction/reputational risk is high (77%) as well as digital assets being outside the scope of current investment mandates (68%). Over half of the respondents said that they don’t have enough knowledge of digital assets (64%).
- 64% of respondents 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.
“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,” said Henri Arslanian, crypto leader at PWC.
“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.”
Diversification and Exposure to New Asset Class are Driving Crypto Investment
Several sell-side participants have launched cryptocurrency-focused offerings in recent weeks as the buy-side’s appetite for digital asset investments continues to increase.
Most recent was Cowen who partnered with digital asset blockchain technology provider PolySign aiming to provide institutional clients access to cryptocurrencies. US investment bank Goldman Sachs also participated in a $15 million funding round for a crypto market data and blockchain technology provider in late spring.
“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,” said Jack Inglis, chief executive officer of AIMA.
Crypto is Challenging Fund Administration
Managers operating in the digital asset space have a set of unique requirements in terms of technology and managing digital assets. A centralized data management strategy is key as firms are starting to look beyond their own research in the asset class and bring in outside data and research. Data scraping to aid decision-making and deliver KPI’s to managers has become the norm with funds that are ahead of the digital transformation curve.
In addition, additional research into the survey AIMA survey suggests that more than half of the surveyed funds use derivatives, with options being the most commonly used tool (31%). As a note, in contrast with previous surveys, funds are taking fewer short positions, with only 28% stating they actively short cryptocurrencies. This is consistent with the extremely bullish views in this market, especially from Q4 2020 and into Q1 2021. Options and shorting digital assets further add administration complexity and certainly increases overall risk.
Additionally, we’ve all come to expect massive volatility in Bitcoin and other digital assets. For example, in March 2020, Bitcoin crashed to $4,904, 53% below its intra-year peak of $10,344 in February. The drop was particularly nasty on March 9th, when prices dropped by 27% in that single day. In light of this event, we asked the crypto hedge funds whether they put new risk management policies in place. Most funds (61%) stated that no changes had been made, with some funds mentioning that they already had risk management systems in place.
Calculating NAV with Digital Assets in Portfolios is Crucial
An independently verified Net Asset Value (NAV) is a crucial piece of information for fund auditors as well as investors, and most Hedge Funds are expecting more developments in this area. Currently, over 88% of the crypto hedge funds in our report this year use an independent fund administrator.
It is becoming increasingly unlikely that savvy institutional investors will select any fund without an independent administrator. While this was acceptable in the early days of the industry, there is no excuse for a crypto hedge fund to calculate its own NAV each month.
Investors expect a monthly NAV to be available and verified by an independent, reputable fund administrator. Cryptocurrency exchanges can provide independent price quotes for certain crypto assets. But for those portfolios made up of less liquid crypto assets, managers may have to source a valuation from an independent third party that satisfies the requirements set out in the Private Placement Memorandum (PPM).
Hedge Funds and other investors are scrambling for tools and technology to uncover the Cryptocurrency or Altcoin investments that will deliver Alpha. Scouring dozens or even hundreds of sources online to find the hidden gems among the thousands of Cryptocurrency and Altcoin investments is an arduous and time-consuming task.
Ryan Eyes can assist firms researching Cryptos by scraping and alerting when data is available across various sites. There are sites that track the currency as it’s mined, and that data is published before the Exchanges post the price. Mining milestones, as well as mining progress of currencies, can be monitored, and alerts triggered based on user-configured metrics.
Due to the pioneering technology of blockchain, certain currencies tend to undergo more scrutiny than other currencies, at times, based on locale. Ryan Eyes can be leveraged to track news and data points based on currencies and alert if a data point changes. Events such as declassification of a crypto on an exchange could cause a condition that would warrant liquidation. Holding certain currencies are subject to different state laws, i.e California, Colorado, Ohio, Texas, and Wyoming.
Ryan Eyes can also give its user base a razor edge advantage through its native web scraping capabilities. This feature allows one to even monitor Social Networks for emerging trends in the Altcoin space. Observing the social trends could allow investors, funds, and regulators to keep a vigilant eye out for bad actors or major changes to a crypto movement based on sentiment.
The ability for products Like Ryan Eyes to assist, capture, monitor then alert based on certain preconfigured or custom triggers will be essential to any firm or individual to stay ahead in this digital age. You can read more about our Web Monitoring and Tracking Capabilities click the link and our PDF will automatically download.
Thanks for reading our post and look for Part 2 on Altcoin investing coming soon!
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