Crypto hedge funds, in particular, are reaping the benefits of volatility. For example, Eric Ervin, co-founder of Blockforce Capital in San Diego, said his fund’s returns are up 18% so far in 2020.
“In these wild months, we’re capturing half of the upside,” Ervin said, referring to the economic rollercoaster that took off in March. “Bitcoin’s really taken a lot of market share back from Ethereum … really dominated as Ethereum tries to figure itself out.”
It’s important to note bitcoin’s market dominance during a global crisis is a cause of correlation, not causation. The godfather cryptocurrency was already surging in 2019. According to the annual report released Monday by Elwood Asset Management and the consulting company PricewaterhouseCoopers (PwC), the value of assets under management at crypto hedge funds more than doubled in 2019 to reach $2 billion.
According to PwC partner Henri Arslanian, co-author of the report that surveyed over 50 funds, more crypto hedge funds trade ether (ETH), 67%, than any type of crypto derivatives (56%), although bitcoin still reigned supreme in 2019 (97%).
Arslanian said the coronavirus crisis inspired more investors to adamantly ask how hedge fund managers reduce counterparty risks, for example, not leaving too much money on any single exchange. If these concerns are quelled, more investors appear eager to enter the market, he said.
"One macro trend we’ve seen since the coronavirus is more general interest in cryptocurrencies,” Arslanian told CoinDesk in an interview.
The vast majority of these funds serve family offices and high-net-worth individuals, an average of 28 individuals per fund, suggesting the technology’s leading use case isn’t “financial inclusion” quite yet. (Many of these funds alone represent more global market share than the known peer-to-peer bitcoin trading volumes of some countries.)
This is why bitcoin appears to be correlated to traditional assets like stocks. When the same small groups own significant chunks of multiple markets, their behavior influences those markets in similar ways. Diversifying ownership is the only way to decorrelate an asset class. In the meantime, traders and investors are making a killing.
The PwC report found the percentage of crypto hedge funds with more than $20 million under management jumped up from 19% to 35% of surveyed funds – shocking growth considering the median starting point for these funds was $2 million.
“We’re starting to notice people are taking our calls a little bit more. There’s a little more interest,” Blockforce Capital’s Ervin said.
Plus, the market shocks in March didn’t feel like an emergency to veteran bitcoin traders.
Paul Veradittakit, co-founder of crypto investment firm Pantera Capital, agreed, saying his fund spent a lot of time so far in 2020 educating nervous investors.
“We wanted to make sure the investors knew what was going on in the market,” Veradittakit said. “We’re rebalancing a bit more into bitcoin to focus on what we think will be the rallying point for crypto during this time.”
Although the venture arm of Pantera is now focused on fewer startups and ensuring those investments have at least 18 months of runway, Veradittakit said overall 2020 has seen the fund’s largest amount of deployed capital to date. A few funds, including Scalar Capital and Polychain Capital, declined to offer comment on their updated strategies by press time.
“[Black Thursday] wasn’t that uncharacteristic of bitcoin, historically,” Ervin said, adding the same concept applies to ETH, which outperformed bitcoin in some previous years.
“[Big business] has embraced Ethereum, and that’s meaningful,” Ervin said. “There’s a significant amount of resources dedicated to Ethereum.”
That’s why the competition is more crowded than ever before. The PwC report tallied at least 150 active crypto hedge funds, more than 63% of which were launched in the past two years. All things considered, PwC’s Arslanian said he expects investors to learn about the market through institutions and eventually bring some of that trading activity in-house.
"We’re in the early stages of the crypto hedge fund industry. The crypto hedge fund industry today is where the traditional hedge fund industry was in the 1990s," Arslanian said.
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