Hedge funds are progressively entering the cryptocurrency market, as highlighted in a new report from the Alternative Investment Management Association (AIMA) in collaboration with PwC.
The survey reveals that nearly half (47%) of traditional hedge funds now have exposure to digital assets, a notable rise from 29% in 2023. This growing interest is attributed to enhanced regulatory clarity and the recent launch of spot cryptocurrency exchange-traded funds (ETFs) in both Asia and the U.S., according to the report released on Friday.
The research further indicates that hedge funds are leaning towards derivatives to gain exposure to cryptocurrencies, moving away from spot trading. This trend reflects a growing sophistication in hedge fund investment strategies.
The report identifies the most favored strategies among traditional hedge funds as market-neutral and discretionary long-only strategies. Market-neutral strategies are particularly appealing for their ability to manage risk while pursuing returns in the volatile digital asset market. Conversely, while discretionary long-only strategies may lack the volatility mitigation of market-neutral portfolios, they offer potential upside from innovative blockchain projects and tokens.
Additionally, funds are adopting quantitative long/short and quantitative long-only strategies to navigate the crypto landscape.
There is also a rising demand for crypto exposure from institutional clients, whether or not these funds are currently investing in cryptocurrencies. James Delaney, managing director of asset management regulation at AIMA, noted that the findings from this year’s report demonstrate a steady recovery in investor confidence over the past year. Factors driving this renewed interest include increased regulatory clarity, highlighted by the European Union’s Markets in Crypto-Assets (MiCA) regulation, advancements in infrastructure, and the approval of new products such as spot bitcoin and ether ETFs by the U.S. Securities and Exchange Commission.
Among funds already engaged in crypto, about one-third are planning to increase their exposure by the end of 2024. However, the report also indicates that most funds not currently involved in crypto have no intention of entering the market. A significant 76% of these funds stated they are unlikely to explore the crypto sector in the next three years, up from 54% in the previous year.
The primary barrier preventing funds from investing in cryptocurrencies is the presence of investment mandates that explicitly exclude digital assets. Other obstacles include regulatory uncertainty, concerns about bad actors in the space, challenges posed by quantum computing, custody issues, restaking complexities, political and government bans, and protocol design challenges.
This report is based on a survey of 100 hedge funds, including both traditional and crypto-focused funds, with an estimated aggregate of $124.5 billion in assets under management.
Related topics: