Understanding Crypto Hedge Funds

There are currently two kinds of cryptocurrency hedge funds. Those that manage portfolios containing exclusively cryptocurrency, and those that have added some cryptocurrency to a mix of other asset types.

As of 2019, there are currently 804 cryptocurrency funds in total, 355 of which are hedge funds and 425 are venture capital funds, according to Crypto Fund Research’s website.

From looking at available data from 80 crypto hedge funds, we were able to make a few conclusions about the current offerings of the industry. They are:

• Out of the 80 funds, 59 have a minimum investment of $100k USD or less.
• Out of 80 funds, only 18 funds publicly report their total AUM.
• More than 90% of the funds we looked at only accept accredited investors.
• The most common performance fee used in the industry is a standard of 20% per year.
• Out of 80 funds, 40 had more positive than negative months in terms of return between inception and August, 2019.
• Out of 80 funds, only 28 had a positive accumulated return between inception and August, 2019.
• More than 90% of the funds have BTC as their primary focus.
• 64% of the funds are based in North America.
• 90% of the funds do not provide any details of their holding period.

Currently, the main focus of crypto hedge funds are Bitcoin and Ethereum.

Hedge funds rely on the fund’s visionary founder and teams of analysts to guide their money in the right direction. Team size looks small compared to the revenues but that number is compensated by the years of experience of the team members.

The majority of fund investors need to keep their money invested for a longer period of time, and withdrawals happen only after a certain period of time. Investors use different strategies to earn active returns.

In a report published in 2019, PwC estimates that there are 150 active crypto hedge funds collectively managing US$1bn AUM, with over 60% of these funds having less than US$10m in AUM and fewer than 10% managing over US$50m.

Out of these funds, 52% use an independent custodian, yet only 25% have independent directors on their board and the average size of a fund team is 7–8 people, with a 64% majority of crypto hedge funds are based in North America, Asia and Europe leading the market too.

Vision Hill also publishes a benchmark index that takes into account 100 active crypto hedge funds and their performance.

Industry Challenges

Restricted Market

Hedge fund investors need to be part of an existing team, either through an asset management firm, or prop trading firm, in order to be able to invest in a new fund. In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have an income at least $200,000 each year for the last two years (or $300,000 combined income if married) and expect to make the same amount.

Strategy

Potential investors in a new fund want to see that the strategy doesn’t depend on specific economic conditions or government policies or a key individual. The strategy needs to be clear: investors want strategies they understand 100% rather than potentially-higher-return-but-complex-and-unclear strategies.

Cryptocurrency = Volatile Non-Secure Market

Nearly 70 crypto hedge funds closed recently. In a recent report, Bloomberg stated that “the inherent volatile nature of bitcoin and other cryptocurrencies has kept institutional investors at bay.”

Reinforcing this idea of the market to investors: recently the International Digital Asset Exchange (IDAX) CEO Lei Guorong vanished along with their cold storage wallet private keys causing a big scandal on social media among IDAX users.

Types of Crypto Hedge Fund

FX or Forex Trading Strategy

• Forex trading strategy is a technique used by a forex trader to determine whether to buy or sell a currency pair at any given time. Forex trading strategies can be based on technical analysis, or fundamental, news-based events. The trader’s currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are available on the internet or may be developed by traders themselves.

Quantitative

• Quantitative strategies are typically run by highly educated teams and use proprietary models to increase their ability to beat the market. There are even off-the-shelf programs that are plug-and-play for those seeking simplicity. Quant models always work well when back tested, but their actual applications and success rate are debatable. While they seem to work well in bull markets, when markets go haywire, quant strategies are subjected to the same risks as any other strategy.

Fund of funds

• FOF is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment.

Multi strategy

• Multi-strategy funds engage in a variety of investment strategies. The diversification benefits help to smooth returns, reduce volatility and decrease asset-class and single-strategy risks. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage.

Arbitrage

• Arbitrage is the strategy of taking advantage of price differences in different markets for the same asset. For it to take place, there must be a situation of at least two equivalent assets with differing prices. In essence, arbitrage is a situation where a trader can profit from the imbalance of asset prices in different markets.

Hedge Fund Marketing

Source

Build your brand strategy first

This internal discipline yields a unified view and clear expression of what your firm seeks to achieve for investors, how it addresses that goal, what makes it uniquely qualified to achieve that goal, and why investors should select and trust your firm. This articulation of the firm’s value proposition serves as the cornerstone of a written marketing plan that should include: tangible business goals, appropriate marketing strategies and tactics, calendarized activity, budgets and accountabilities. Any firm that operates without a formal plan (which should be simple, and not require a lengthy process to create), eventually becomes a victim of “trust me, it’s working” marketing.

Create a bona fide website, not a proxy.

In an online world, websites are the mother ship of market transparency. If a hedge fund is unwilling to provide on its website essential information related to its capabilities and credibility, then the firm is not really serious about market communication. Ideally, your website should express institutional values, explain processes, showcase human capital, provide examples of thought leadership and include inherent third-party endorsements. It’s not a sales pitch or report card. Your website will generate investor interest by allowing visitors to draw their own conclusions about the firm and its potential to help them achieve their goals.

Leverage your firm’s intellectual capital.

Thought leadership — which is overused marketing jargon — is a strategy that leverages knowledge and ideas to engage target audiences. Effective thought leadership can involve a broad range of marketing tactics, but should always be designed to achieve measurable business goals; not to simply have people think you’re smart. A hedge fund’s intellectual capital represents its most powerful market differentiator, and can be showcased without giving away any proprietary information or methodologies.

Harness the market reach of LinkedIn.

LinkedIn has become an important due diligence tool for investors, intermediaries and the press. Most hedge funds understand this, and either provide a very basic firm profile, and/or allow its employees to post their personal profiles on LinkedIn. But to harness LinkedIn’s enormous market reach and professional clientele, hedge funds need to establish a buttoned-up institutional LinkedIn presence that’s consistent with the firm’s (bona fide) website; ensure that its employees’ profiles enhance the firm’s brand positioning; and take full advantage of appropriate user groups on LinkedIn to raise brand visibility and display its thought leadership.

Hold off on Twitter and other social media sites.

Twitter can be a great information source, and most hedge funds should use it exclusively for that purpose: to listen rather than to speak. Twitter is a content beast that demands constant feeding, but few hedge funds have the time or social media sophistication to engage safely and consistently. Facebook is not an appropriate channel for hedge funds, and posting comments on independent blogs or online publications will not yield meaningful results.

Manage press exposure selectively.

Beneficial media exposure can provide valuable brand credibility. But this is a high-risk tactic because reporters have agendas, can make mistakes, and are not in business to make your firm look good. However, hedge funds should proactively seek media exposure through participation in targeted editorial opportunities — such as bylined articles, op ed pieces and certain types of feature articles — that provide total or nearly complete control over what’s published. Although guest spots on financial news channels such as CNBC can fuel the ego, these are high-risk opportunities that most hedge funds should avoid.

Merchandise conference participation.

Investor conferences are high-cost tactics that can be effective for hedge funds. But these events often yield low results because firms fail to properly re-purpose the related thought leadership they’ve produced, which can serve as raw material to influence target audiences that are much larger, and sometimes of higher value, than those in attendance at the conference. Doing all the heavy lifting (in terms of content preparation, travel, time away from office and home), but failing to benefit from that investment either before or after the event itself, represents a tangible opportunity loss.

Forget advertising for now, and perhaps forever.

Regulators have not made it easy for hedge funds to understand the rules of the new advertising game, so the industry is better off encouraging the very large players — with deep compliance muscle — to be the first ones on the field. But there are more significant reasons why most hedge funds should never include advertising in their marketing plans. Notably, institutional advertising is expensive, it requires a long-term commitment, and, it is very difficult to measure or generate a market response. More importantly, at most hedge funds there is an extensive list of marketing strategies and tactics (for example, building an effective website) that should be addressed first, and that will provide a more meaningful return than advertising.

As market dynamics of the investment world drag hedge funds, however reluctantly, into the new era of transparency, there is some good news for those firms. Hedge funds have long demonstrated their ability to sustain a successful business enterprise without traditional marketing tactics. So any benefits that effective market communication might provide for them are very likely to result in incremental asset growth. Additionally, because hedge funds do not currently depend on marketing for survival, they can act in a deliberate, strategic manner.

Hedge funds have the luxury of being able to design and implement their marketing programmes incrementally, and to focus on doing a limited number of things very well. In that regard, other vertical industries may eventually point to hedge funds as examples of best practices in branding and marketing. So perhaps hedge funds are not marketing Neanderthals. They are simply late bloomers.

Notable Crypto Hedge Funds

• GrayScale is a leader in digital currency investing, Grayscale provides unparalleled market insight and investment exposure to the developing digital currency asset class. Charts can be found on various organization profiles and on Hubs pages, based on data availability.One of the biggest crypto hedge funds out there with more than 130 crypto-related projects and 84% of its client base being institutional since July 2018.
• PolyChain is the first employee at Coinbase, seeks to provide its investors with “exceptional” returns through active management strategies. The fund invests in digital currencies and not companies.
• Galaxy Digital is a full service, digital assets merchant bank. Galaxy Digital is undertaking the Transaction in order to raise primary capital towards building a best-in-class, full service, institutional-quality merchant banking business in the cryptocurrency and blockchain space.
• Metastable is a hedge fund focused on investing in cryptocurrencies and tokens.
• SolidX is an innovative software development and financial services company focused on bringing blockchain technology to enterprise customers.