By Prior to 2017, there were only a small number of specialized funds investing in bitcoin and other cryptocurrencies. Since the start of 2017, however, digital asset hedge fund launches have taken off at an unprecedented rate, with the aim of capitalizing on skyrocketing crypto asset values.
Two-thirds of existing crypto hedge funds were launched within the last 18 months, reflecting the soaring level of launches. With 90 cryptocurrency hedge funds having been launched in the first three quarters of 2018, the total number of crypto hedge fund launches is estimated to be 120 for the year ending in 2018. Crypto hedge fund launches will therefore make up approximately 20% of the total number of hedge funds launched in 2018, which are estimated to be 600 in total. This is a substantial increase from previous years, where crypto hedge fund launches made up only 16% of the total number of hedge funds launched in 2017 and only 3% in 2016.
Traditional trends see hedge funds historically tending to be launched more in bull markets. With leading cryptocurrencies not performing well this year and market leaders Bitcoin and Ethereum down 50% or more, the frequency of crypto hedge fund launches in this bear market is against the traditional trend.
Maturing Crypto – graphic Markets
The increase in the number of digital asset hedge funds launched in the past eighteen months is a testament to how fast the cryptographic asset market is growing, and maturing into a viable asset class that even institutional investors and high net worth individuals are comfortable investing in.
Hedge funds aim to generate absolute returns for their investors, hence, it is unsurprising that hedge fund managers are increasingly venturing into digital assets with the potential to outperform present low bond yields and equity markets in terms of average annual returns. This is likely a contributing factor in the soaring level of crypto hedge fund launches despite the lacklustre performance of cryptocurrencies.
According to Crypto Fund Research, there are currently 303 crypto hedge funds, which is a small number when compared to the approximately 9,000 hedge funds currently operating. The number of crypto hedge funds represents approximately 50% of the broader class of crypto funds, which includes crypto venture capital and crypto private equity funds, estimated to be worth just less than $4 billion.
Impact and Sustainability
The rise in crypto hedge fund launches is a global phenomenon, with launches taking place in Australia, China, Malta, Switzerland, the Netherlands, and the United Kingdom.
According to Joshua Gnaizda, founder of Crypto Fund Research, “in the midst of 2018’s decline in traditional hedge fund launches, crypto hedge funds are a notable aberration”. Despite softer cryptocurrency prices and regulatory uncertainty surrounding cryptocurrencies, “these seemingly unfavourable market conditions have not deterred managers from launching new crypto hedge funds at a record pace”. Even so, he felt that the rate of new launches was not sustainable in the longer-term despite there being few signs of a significant slowdown at present.
Although different crypto hedge funds will have different strategies to generate returns for their investors, the increase in the number of crypto hedge funds will have a corresponding increase in trading activity, a surge in algorithmic trading, more leverage in the markets, and, potentially, an increase in market volatility.
What do you think of the aggressive growth in crypto hedge funds in a bear market? What will this mean for investors? Give us your thoughts in the comments below.
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