Way back in 2018, one of the top stories in crypto was institutional money finally flowing into the space after nearly a decade of waiting on the sidelines. That’s no longer really news unless the institution is someone like megawhale Blackrock.
Today, a recent survey by fund administrator Intertrust found cryptocurrencies are increasingly popular among hedge fund managers.
What’s a hedge fund?
Most of us have heard the phrase on the news, and associate it with vague impressions of super-wealthy Wall Street types who summer in trophy mansions on Martha’s Vineyard and own their own jets. That’s not wrong, but there’s a little more to it.
A hedge fund is a type of alternative investment category that takes money from investors and invests it in a wider (often more aggressive) variety of financial instruments in an attempt to make outsized profits. Hedge funds often use derivatives (like puts and calls), leverage and arbitrage to boost both return and risk. Hedge funds are expensive (2% annual management fee plus 20% of profits is standard). They also tend to be illiquid, locking up investors’ funds for at least one year.
So why does hedge fund interest matter?
As seen on Financial Times, Intertrust spoke to 100 global hedge fund CFOs about their crypto exposure plans over the coming years. On average, the respondents said that they expect to increase their portfolio to 7.2% crypto over the next five years. That would amount to some $312 billion in crypto assets (or about 12x the GDP of El Salvador). Let’s look at that number from another perspective: today, the global crypto market cap is just below $1.6 trillion. Hedge funds would add another 6.3% to the total crypto market.
17% of the respondents said they expect a portfolio allocation of above 10% in the next year or two. Interestingly, U.S. hedge funds seem more open to investing in crypto, with North American fund CFOs forecasting an average exposure of 10.6% compared to an average of 6.8% by those from the U.K. and Europe.
David Miller, executive director at Quilter Cheviot Investment Management, had an interesting perspective: hedge funds “are well aware not only of the risks but also the long-term potential,” he told FT.
Hedge funds see the balance of short-term risks and long-term potential
In order to achieve above-market gains, hedge fund managers need an acute sense of risk and reward. They must be willing to investigate less-trafficked corners of the market and constantly searching for new opportunities for arbitrage and profit. (Otherwise they’d be mutual fund managers.)
Here’s where some leading hedge fund managers are with their cryptocurrency moves.
Hedge fund manager Paul Tudor Jones has been a vocal bitcoin proponent while most institutions were still giving the space a curious look.
Alan Howard is not too far off when it comes to belief in crypto, and has accordingly already shifted some of Brevan Howard’s $14 billion in assets towards crypto.
Man Group and Renaissance Technologies are examples of other big-name hedge funds with some sort of crypto exposure. Both are on the list of hedge funds with the biggest Ethereum bets.
The U.S. fund firm SkyBridge Capital (founded by former White House communications director Anthony Scaramucci) outperformed this year primarily due to timely Bitcoin investments.
While some might point out that hedge funds have a much greater risk tolerance than other investors, latest data by Coinbase seems to argue the opposite. Its Tuesday report showed that institutional holdings grew by 170% in the first quarter, rising from $45 billion to $122 billion. Besides hedge funds, pension funds accounted for a sizeable part of Coinbase’s institutional investors.
Wait — pension funds? They usually have less appetite for aggressive assets. Remember, a pension plan’s goal is to provide a steady stream of payments to retirees. Finding themselves in a near-zero-interest-rate environment, with “safe” asset classes like U.S. Treasurys and investment-grade corporate bonds actually losing money after inflation, even the normally-stodgy pension funds like CalPERS find themselves stretching into new asset classes in search of inflation-beating return on investment.
Even in the face of recent crypto pullbacks, the growing interest in the crypto space from retail and institutional investors grows. Those of us who already own cryptocurrencies might feel a little smug at the notion of hedge funds suddenly “discovering” an underappreciated asset class. Those of us who don’t own crypto directly might already be an indirect participant thanks to hedge funds and pensions buying in on our behalf.