More than a Third of Traditional Hedge Funds Now Invest in Digital Assets

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, according to PwC. 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 $4.1bn in 2021, up 8% from the year prior.

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 $58.6 million from $23.4 million in the previous year, while the median AuM nearly tripled to $24.5 million from $8.5 million. From 2020 to 2021, the percentage of crypto hedge funds with AuM exceeding $20 million increased from 46% to 59%.

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%.

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 the main obstacle by 83%.

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 several market infrastructure areas in need of improvements for digital asset adoption. They are 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%).