Crypto hedge funds are proliferating at an accelerating pace – estimated to now number more than 300

Even with the tremendous volatility in the sector, there are many more traditional hedge funds investing in crypto and more specialist crypto funds being created as the digital asset class gains acceptance.  Of traditional hedge funds surveyed, 38% are currently investing in digital assets, compared to 21% a year ago.  Meanwhile, the number of specialist crypto hedge funds is estimated to now top 300 globally, with the pace of new funds being created accelerating in the past two years. Total assets under management (AuM) of crypto hedge funds surveyed was US$4.1bn in 2021, up 8% from the year prior.  These are findings from PwC’s 4th Annual Global Crypto Hedge Fund Report 2022, produced together with the Alternative Investment Management Association (AIMA) and Elwood Asset Management (now part of CoinShares).

According to the report, most traditional hedge funds getting into digital assets are still just dipping their toes – 57% have less than 1% of total AuM in digital assets.  But it is notable that for 20% of these funds, digital assets represent between 5% and 50% of AuM.  Further, two-thirds of funds (67%) currently investing in digital assets intend to deploy more capital into the asset class by the end of 2022.

For specialist crypto hedge funds surveyed, the average AuM more than doubled to US$58.6mn from US$23.4mn in the previous year, while median AuM nearly tripled to US$24.5mn from US$8.5mn. From 2020 to 2021, the percentage of crypto hedge funds with AuM exceeding $20mn increased from 46% to 59%.

John Garvey, Global Financial Services Leader, PwC United States, said: “The recent collapse of Terra vividly demonstrated the potential risks in digital assets.  There will continue to be volatility, but the market is maturing and with that is coming not only many more crypto-focused hedge funds and higher AuM, but also more traditional funds entering the crypto space.”

Crypto hedge fund performance cools somewhat but continues to be robust

Crypto hedge funds continue to achieve strong growth, despite crypto’s volatility.  According to the report, the median crypto fund returned +63.4% in 2021, though that was significantly off the +127.55% median return of 2020.  Winning trading strategies (on a median return basis) were led by discretionary long /short (+199%) followed by discretionary long only (+176%), quantitative long only (+109%), quantitative long /short (+66%) and market neutral (+26%). Most crypto hedge funds traded Bitcoin ‘BTC’ (86%) followed by Ethereum ‘ETH’ (81%), Solana ‘SOL’ (56%), Polkadot ‘DOT’ (53%), Terra ‘LUNA’ (49%) and Avalanche ‘AVAX’ (47%).

Crypto hedge funds are also involved in cryptocurrency staking (46%), lending (44%) and borrowing (49%). The proportion of crypto hedge funds trading derivatives has also increased considerably, to 69%, from 56%.

More traditional hedge funds invest in crypto, but some remain hesitant

The number of traditional hedge fund managers not investing in digital assets is shrinking – down to 62% of respondents from 79% a year ago. Of those not currently investing, nearly a third, 29%, are in late-stage planning to invest or are looking to invest.  Still, a significant number of managers remain hesitant – 41% of those not currently investing say they are unlikely to invest for the next three years, while 31% say they are curious about digital assets but waiting for further maturation of the market.

Regulatory uncertainty is a key issue for hedge funds, whether or not they are currently invested in digital assets.  Lack of regulatory and tax regime clarity was cited as a top challenge by 89% of hedge fund managers who currently invest in digital assets and for managers not currently investing in crypto, regulatory uncertainty ranked as a main obstacle by 83%.

Investment experience and improved governance can support crypto fund growth

Crypto-focused funds are attracting an increasing amount of investment talent, according to the report. In 2021, the average investment team size grew from 7.6 to 9.6 people.  There is also an increasing focus on operations and governance. The percentage of crypto hedge funds using an independent custodian increased in 2021 from 76% to 82%. The vast majority, 91%, of funds surveyed have hired an independent auditor. The number of funds with independent board directors also saw a marked increase to 51% in 2021, compared to 38% in 2020.

In the traditional hedge fund space, managers point to a number of market infrastructure areas in need of improvements for digital asset adoption, led by audit and accounting, identified by 94%, and also including risk management and compliance (93%), ability to use digital assets as collateral (93%) and fund administration (89%).

Olwyn Alexander, Global Asset and Wealth Management Leader, PwC Ireland (Republic of), said: “Increasing appetite and demand from investors has spurred interest in crypto as an asset class, spanning retail to institutional. In addition to the numerous hedge funds investing in crypto, many larger "traditional" asset managers have been exploring the crypto space, working on pilots, and are now starting to launch product.  This will help to accelerate the institutionalisation of the crypto markets and, as they mature, regulation and infrastructure will continue to improve.  Given recent market developments, we are hearing greater demand for transparency and trust from investors.”       

The data contained in the report, the 4th annual edition, comes from research conducted in Q1 2022 across a sample of 77 specialist crypto hedge fund managers. The report specifically focuses on crypto hedge funds and excludes data from crypto index/tracking/passive funds and crypto venture capital funds.  We have worked with Elwood Asset Management (now a part of CoinShares) to obtain survey responses from crypto hedge fund managers.  We worked with the Alternative Investment Management Association (AIMA) to obtain data from non-crypto focused hedge funds (referred to as ‘traditional’ hedge funds.