How Do Cryptocurrency Hedge Funds Work and Are They Worth Investing In?
Hedge funds are popular among investors as a way to start investing in diversified assets. Can hedge funds work just as well for crypto markets?
The record-breaking bull run of 2017 skyrocketed cryptocurrencies into the limelight in the investing space. Although prices have gone down significantly since then, the fundamentals of cryptocurrencies have improved so much that crypto hedge funds are growing exponentially, with PwC estimating that there are over 150 active funds globally with an average AUM size of $21.9 million.
How Does a Crypto Hedge Fund Work?
A crypto hedge fund does not differ much from its traditional counterpart in terms of services and the way products are offered.
Crypto hedge funds offer investors the chance to invest in a basket of cryptoassets that are handled by experienced fund managers. Investors earn from the trading decisions of managers, who then take a portion of the profits as commission just like traditional hedge fund managers.
Crypto hedge funds are a great way for new investors to get involved with cryptoassets and the blockchain industry. Of course, there are other types of funds, including exchange-traded funds (ETFs). However, the familiarity and peace of mind that comes with hedge funds make them a popular option, particularly among more risk-averse investors.
The strategy of crypto hedge funds varies from firm to firm. Some funds only invest in one cryptocurrency like bitcoin, while others may invest in a diversified pool of cryptoassets to lower risk levels.
It’s important for investors to do thorough research on crypto funds first before locking in any contracts. Investors must first ensure the trading strategy of the chosen firm aligns with their expectations, which is particularly important in crypto markets due to their volatility.
What Lawmakers Are Saying About Crypto Hedge Funds
The Securities and Exchange Commission (SEC) laid out plans to regulate the operations of crypto hedge funds earlier this year. The fundamental goal of the SEC’s regulations is to protect customers from fraud and scams. This is achieved by ensuring that:
- Cryptoassets are valued appropriately according to market values
- Business practices are fully transparent, ethical, and adhere to state and federal laws
- Adequate security measures (e.g. KYC, AML) are in place to safeguard client funds and prevent money laundering and tax aversion
At this point in time, only security tokens are regulated by the SEC, although the institution has expressed interest in expanding its regulations further down the line. Cryptoassets that are used as currencies (e.g. stablecoins) are not fully regulated yet as they do not qualify as securities.
The SEC also only has authority over US-based transactions. That said, jurisdictions in other countries are likely to follow the SEC’s footsteps and guidelines in regulating all forms of crypto funds.
The Benefits of Engaging with Crypto Hedge Funds
- Expert Fund Management
The volatility and immaturity of crypto markets make it a challenge to thrive for even the most experienced of investors. With crypto hedge funds, investors can rest well knowing their funds are in the hands of industry veterans, not to mention the plethora of cutting-edge crypto trading tools available to them today.
Rather than wasting time keeping track of crypto updates and price movements, experienced fund managers make profitable decisions in the market on behalf of investors, making crypto investing hassle-free.
2. Forget About the Technical Side of Crypto
Following from the point above, learning about cryptoassets and how they work can be tough due to their highly technical nature. Just understanding how the blockchain works — even for something as basic as setting up a wallet — can be overwhelming for the less tech-savvy.
By engaging with crypto funds, investors don’t need to deal with the know-hows of crypto transactions. This eliminates the risks of losing valuable funds to silly mistakes in sending and storing cryptocurrencies, improving customer security.
3. Portfolio Diversification
Crypto hedge funds usually invest in a list of promising cryptocurrencies to generate the best returns.
Diversification has long been proven to be effective in reducing investment risk levels, which includes crypto markets as well. Again, choosing which cryptoassets to diversify in is the responsibility of the hedge fund manager, so investors don’t have to worry about doing the dirty work.
4. Increased Buying Power
Hedge funds have significantly higher buying power thanks to its large pool of funds. The bigger the capital of a firm, the more likely it is to generate a high alpha for its clients. Crypto hedge funds also have the advantage of gaining access to investment opportunities that are not open to individual investors thanks to their wealth.
The Risks of Working with Crypto Hedge Funds
1. Limited Control Over Investments
Investors can only trust fund managers to safeguard their funds and turn a profit. Not having to manage portfolios is a benefit. This can also backfire horribly. For instance, if a crypto fund suddenly goes AWOL.
2. Expensive Management Fees
The management and performance fees of some crypto funds may exceed or come close to the realized profits. Investors should evaluate the fee structure of firms closely to avoid losing money to costly management fees.
3. Volatile Markets
Cryptocurrencies are infamous for being volatile, although it has gotten better today as the blockchain industry matures. Investors looking for a stable investment with little to no risk should not invest in crypto markets, at least not for the next few years.
4. Ever-Changing Regulations
Financial institutions and government bodies all over the world are still working hard on regulating cryptoassets, with their decentralized nature making regulation more complicated. For the foreseeable future, cryptoassets and the activities surrounding them will continue to be under the watchful eyes of regulators, which could raise serious concerns among investors.
Despite the risks, crypto hedge funds have their fair share of benefits that could sway investors to take a chance on cryptoassets. A good rule of thumb is to always research a crypto fund from A to Z before putting any money on the table.
How Does Blue Swan Grading Benefit Crypto Fund Managers and Investors?
No matter if you’re an individual investor or fund manager, crypto data is the most important asset to have in making informed decisions. However, keeping up with the latest regulations and compliance updates in the crypto space can be resource-consuming for those who have more important tasks on their hands.
This is where the right crypto market intelligence system comes in handy. A professional-grade, multi-channel big data platform like Blue Swan gives investors everything they need to know about the latest regulation updates and news in the industry to better manage client funds.
Blue Swan Grading benefits investors immensely by offering a comprehensive crypto analytical framework that aggregates and analyzes essential data from a diversity of sources, offering a comprehensive market overview.
Blue Swan does everything from analyzing news and media coverage to assessing the development status of projects. The platform also takes into account the skills and reputations of the teams behind crypto projects while keeping up with their regulatory compliance (or lack thereof). In short, the platform offers unbiased market analysis and project ratings and classifications that investors need, allowing them to make faster and smarter trading decisions.
Blue Swan Grading also offers API tools and customizable features for developers to make full use of the platform.
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