Bitcoin: New asset class leader, or are skeptics right?

Crypto hedge fund performance may tell the story.

According to industry estimates, hedge funds that specialize in cryptocurrency investments account for just .2% of the global hedge fund business with just over $3 billion in AUM. However, thanks to a 200% average performance in 2020 followed by a 75% increase through the end of February, based upon data provided by Eurekahedge, allocations to this growing asset sector are bound to increase.

If there is one fact that both the believers in and the skeptics of cryptocurrencies can agree on, it is that this is probably the most volatile of all asset classes. Some even question whether crypto is in fact an asset class. Recently however, this volatility has been a boon to hedge funds as the bull market in crypto has seen the price of Bitcoin, the most well known and widely held crypto currency, rise more than 700% in the past 12 months. Recognized asset class or not, performance like that will get your attention!

As crypto markets have begun to mature, especially since offerings of Bitcoin futures contracts on various commodity exchanges and more recently, options on Bitcoin futures, hedge funds can now engage in more sophisticated trading and hedging strategies rather than just a simple buy/hold structure. Active managers using systemic long/short strategies can potentially capture alpha in both bull and bear markets. And rest assured, just as in all asset classes, when the bull gets tired, the bear comes out of hibernation.

The strong performance in the crypto space naturally has not gone unnoticed by professional and institutional investors.  The early days of crypto investing were mainly dominated by private investors and traders. Since early 2020, there has been a large inflow of professionals into the space. According to a survey done by PricewaterhouseCoopers, fully 63% of the largest 150 global crypto hedge funds were launched since 2019. Almost half of all crypto funds use a self-described quantitative strategy while the remaining 50% are divided between long only, long/short and multi-strategy. In terms of performance, while all strategies have generated substantial alpha in this recent bull market, only quant has been able to deliver consistent alpha in up and down markets.

Legendary investors such as Paul Tudor Jones and Stanley Druckenmiller have called Bitcoin “a store of value” and “capable of outperforming gold as a store of value” respectively. When mainstream, successful money managers such as these become believers, other institutional and professional investors are likely to follow.  And for those who are smitten with celebrity, take note that famed rapper Jay-Z has launched a bitcoin development fund along with Twitter CEO Jack Dorsey.

For the crypto market to continue its growth, there will have to be an ever-increasing amount of faith in the financial institutions that provide crypto-related services. People must have faith in their institutions for society to operate effectively. Unfortunately, today, many people, especially young people, have little faith in the older, established financial institutions. This fact was clearly demonstrated in the tug of war between Wall Street and Main Street, which resulted in the “short squeeze” phenomenon with GameStop in January and February this year.

The GameStop episode shows that younger investors are increasingly willing to begin flexing their investing muscles. If one takes into consideration the multi-trillions of dollars of wealth that will be transferred from baby-boomers to their tech savvy offspring after their retirement, you begin to appreciate the potential for all things digital. Younger investors want to trade using their smart phones, on a 24/7 basis that cryptocurrencies already embrace. The opportunity to manage a portion of that wealth is what is driving the growth in the number of crypto hedge funds.



John Zoraian John Zoraian is a Principal in Grassi’s Financial Services practice, where he provides expert fund administration, compliance and advisory services to hedge and private equity funds, funds of funds, master-feeders, investment advisors, broker-dealers, family offices, fintech entities and more. John draws from more than 35 years of experience in the hedge fund business. Prior to joining Grassi, he established S&Z Fund Services, a division... Read full bio

Categories: Advisory