A new survey indicates that with the improvement of regulatory transparency and the launch of exchange-traded funds (ETFs) in the United States and Asia attracting more investors, nearly half of hedge funds focused on traditional asset classes are now investing in cryptocurrencies.
The Global Crypto Hedge Fund Report released last week by the Alternative Investment Management Association (AIMA) and PwC showed that 47% of hedge funds trading in traditional markets hold digital assets, up from 29% in 2023 and 37% in 2022. The survey found that among funds that have already invested in digital assets, 67% of funds plan to maintain the same level of capital in the cryptocurrency sector, while the rest plan to increase their investments before the end of 2024.
Although many hedge funds initially entered the cryptocurrency market by trading tokens in the spot market, they are now increasingly deploying more sophisticated strategies. The report indicated that among funds involved in cryptocurrencies, 58% traded derivatives in 2024, up from 38% in 2023, while the percentage of funds trading in the spot market dropped to 25% this year after reaching a peak of 69% last year.
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James Delaney, Managing Director of Asset Management Regulation at AIMA, stated: "The results of this year's report show a steady recovery of confidence over the past year. We are beginning to see regulatory clarity on a global scale. This clarity undoubtedly boosts investors' confidence in this asset class."
Due to significant price volatility, cryptocurrencies often provide profitable trading opportunities for funds willing to take risks.
Edward Chin, co-founder of digital asset investment firm Parataxis Capital Management, said: "Given the lower market efficiency, employing traditional investment strategies can generate higher returns in the cryptocurrency sector." He stated: "Simple market-neutral arbitrage trading strategies in traditional asset markets can yield mid-to-high single-digit returns, but in the cryptocurrency market, the return rate can reach 20% to 30%." He added that deploying a large amount of capital in a market that is still much smaller than traditional asset classes is a challenge.
Opportunities are not limited to crypto tokens themselves. For instance, after the 2022 bear market, the debt of digital asset companies may become attractive. In July, media reported that hedge funds, including Diameter Capital Partners, Canyon Partners, and Farallon Capital Management, acquired $874.5 million in debt from BlockFi, a loan institution owed by the bankrupt crypto exchange FTX.
Nevertheless, some hedge fund managers remain on the sidelines. The survey showed that 76% of fund managers who are not currently investing in such assets said they are unlikely to change their minds in the next three years, a higher percentage than the 54% in 2023. Excluding digital assets from their investment mandate is the main reason.
The survey found that two-thirds of traditional hedge funds do not plan to include Bitcoin ETFs in their current digital asset strategy.
Out of the 100 hedge funds surveyed, 42% are funds investing in traditional assets, with the rest focusing on cryptocurrencies. The survey was conducted in the second quarter when Bitcoin hit a historical high in March. Currently, Bitcoin stands at $64,000 per coin, still about 10% lower than its historical peak.