Crypto hedge funds are bullish on Bitcoin and knee-deep in DeFi

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The volatility that has grow to be synonymous with the crypto business hasn’t deterred establishments from taking part in it, as hedge funds investing in crypto are at an all-time excessive, based on PwC’s 2022 World Crypto Hedge Fund Report.

The annual report surveys each conventional hedge funds and specialist crypto funds to realize a greater understanding of how the comparatively new, however extraordinarily dynamic sector of the business features.

Crypto hedge funds surge in numbers

PwC’s analysis reveals there are over 300 crypto-focused hedge funds presently available on the market. Whereas some may attribute this development to the maturity of the crypto business, information from the report means that the launch of latest crypto hedge funds seems to be correlated to the value of Bitcoin (BTC).

Knowledge confirmed that numerous funds had been launched in 2018, 2020, and 2021 — all very bullish years for Bitcoin — whereas much less bullish years have seen far more average exercise.

Nevertheless, most new crypto hedge funds often make use of funding methods that don’t rely available on the market going up. In a survey of over 70 crypto hedge funds, PwC discovered that nearly a 3rd of them employed a market-neutral investing technique. Aiming to revenue whatever the course of the market, these funds often use derivatives to mitigate danger and get extra particular publicity to the underlying asset.

The second hottest buying and selling technique is a quantitative lengthy and quick technique, the place funds take each lengthy and quick positions primarily based on a quantitative method. Market-making, arbitrage, and low-latency buying and selling are the most typical methods used. Regardless of being in style amongst hedge funds and offering good returns, these methods limit funds to solely buying and selling extra liquid cryptocurrencies.

Most typical methods of crypto hedge funds (Supply: PwC’s 4th Annual World Crypto Hedge Fund Report 2022)

On a median foundation, funds using a discretionary lengthy and quick technique have been the best-performing ones. PwC’s information confirmed that these funds confirmed a median return of 199% in 2021. Wanting on the common return reveals that discretionary lengthy funds have been the most effective performing ones, displaying returns of 420% in 2021. Market impartial funds significantly underperformed funds with different methods, displaying a mean return of simply 37%.

PwC notes that returns proven by discretionary lengthy and quick funds had been those using a technique that most closely fits the market on the time, as intra-period Bitcoin returns peaked at 131% final yr.

2021 year-end crypto hedge fund efficiency by methods (Supply: PwC’s 4th Annual World Crypto Hedge Fund Report 2022)

Nevertheless, with a median efficiency of 63.4% in 2021, PwC’s pattern of hedge funds was solely in a position to barely outperform Bitcoin’s value, which elevated by round 60% all year long. And whereas completely different methods yielded completely different ranges of efficiency, all methods in 2021 underperformed when in comparison with 2020.

“The bull market in 2021 didn’t lead to the identical stage of good points as that of 2020, with BTC growing simply 60% in comparison with about 305% the yr earlier than.”

PwC famous that returns aren’t the one worth proposition of hedge funds. What they provide traders is safety towards volatility and the information within the report doesn’t paint an image of whether or not the methods had been in a position to supply increased or decrease volatility in return to cryptocurrencies. Even with low returns, hedge funds that present decrease volatility could possibly be extra enticing to traders.

Property beneath administration on the rise

Final yr’s sluggish efficiency and excessive market volatility definitely haven’t affected the amount of cash traders put into hedge funds.

The report estimates that the whole property beneath administration (AuM) of crypto hedge funds elevated by 8% to about $4.1 billion in 2021. The median AuM of crypto hedge funds tripled to $24.5 million in 2021 in comparison with the earlier yr, whereas the typical AuM elevated from $23.5 million in 2020 to $58.6 million in 2021.

Complete property beneath administration of crypto hedge funds (Supply: PwC’s 4th Annual World Crypto Hedge Fund Report 2022)

Managing all of these property comes with a value. Identical to conventional hedge funds, crypto funds cost their traders a 2% administration and a 20% efficiency charge.

“One would count on crypto hedge fund managers to be charging increased charges given the decrease diploma of familiarity with the product and the upper operational complexity akin to opening and managing wallets – resulting in a much less accessible marketplace for particular person traders, but it surely appears this has not been the case.”

PwC expects crypto funds to incur increased prices as the general crypto market develops. With regulators world wide demanding increased safety and compliance requirements, crypto hedge funds will more than likely need to up their administration charges to maintain worthwhile.

Nevertheless, the 20% efficiency charge may proceed to get decrease within the coming years as extra funds and different establishments start coming into the crypto area. Common efficiency charges decreased from 22.5% to 21.6% p.c in 2021, displaying that the rising variety of new funds coming into the area are starting to compete to draw new purchasers.

One of many strategies crypto funds appear to be utilizing to draw purchasers is providing a various funding portfolio. Whereas 86% of the funds mentioned that they’ve invested in “retailer of worth cryptocurrencies” akin to Bitcoin, 78% mentioned that they’ve been investing in DeFi.

Lower than a 3rd of funds mentioned that half of their each day buying and selling quantity is in BTC. When in comparison with final yr’s 56%, it reveals that funds are quickly diversifying into altcoins. After BTC and Ethereum (ETH), the highest 5 altcoins crypto hedge funds traded had been Solana (SOL), Polkadot (DOT), Terra (LUNA), Avalanche (AVAX), and Uniswap (UNI).

Cryptocurrencies traded by crypto hedge funds in Q1 2022 (Supply: PwC’s 4th Annual World Crypto Hedge Fund Report 2022)

It’s nonetheless unclear how the de-pegging of TerraUSD (UST) and the next collapse of LUNA affected these funds, as PwC’s survey was carried out in April earlier than these occasions passed off. The corporate believes that we’ll see capital inflows into the crypto market decelerate for the rest of the yr as traders grow to be extra cautious.

“Many funds have but to put up their Could 2022 returns and it’ll solely be as soon as these are out that it is going to be doable to evaluate the influence of the Terra collapse and the broader downturn in crypto markets. In fact, there will even be funds that already had a bearish outlook or had been in a position to regulate and determine the problems at Terra higher, managing their exposures and even taking quick positions over this era. Corrections are to be anticipated. The market has recovered earlier than and there’s no motive to consider it gained’t rebound once more,” John Garvey, the worldwide monetary companies chief at PwC, instructed CryptoSlate.

PwC believes that the warning will unfold to stablecoins as properly. Along with altcoins, stablecoins have additionally considerably grown in reputation amongst hedge funds. The 2 largest stablecoins when it comes to utilization had been USDC and USDT, with 73% and 63% of funds utilizing them, respectively. Slightly below a 3rd of crypto funds reported utilizing TerraUSD (UST) within the first quarter of the yr.

“It’s fascinating to notice that regardless of USDT’s market capitalization being virtually double that of USDC, hedge funds appear to want utilizing USDC. We consider that is as a result of higher transparency supplied by USDC across the property backing the stablecoin.”

The rise in stablecoin utilization could possibly be defined by an analogous enhance in the usage of decentralized exchanges. Based on PwC’s report, 41% of crypto funds reported utilizing DEXs. These dabbling in DeFi appear to flock to Uniswap, as information confirmed that 20% of funds used the platform as their most popular DEX.

Bullish on Bitcoin

Regardless of the market being fairly bearish on the time PwC’s survey was carried out, most crypto funds remained bullish on Bitcoin. When requested to present their estimate on the place the value of BTC will probably be on the finish of the yr, the bulk (42%) put it within the $75,000 to $100,000 vary. One other 35% predicted it will vary between $50,000 and $75,000.

The distribution of Bitcoin value predictions for the top of 2022 (Supply: PwC’s 4th Annual World Crypto Hedge Fund Report 2022)