Marc D. Seidel
The Rise of the Crypto Hedge Fund
The crypto space is exciting and full of possibilities, but it is risky, volatile, and demanding if you try to manage everything on your own. Until the industry matures more, actively managed investment solutions, like AltAlpha Digital’s fund of funds using an AMC structure, provides easy bankable access for investors to take advantage of a diversified position within this emerging technology.
Before I dive in, I just want to say what a pleasure it is to be a part of the BFI Capital Group blog writing team. I have actually worked with BFI for 9-years prior, having held a few different positions within the Group before leaving a short time to test the waters of the tech world. Now, a Partner in the Alternative Investments under BFI Consulting AG, working specifically for AltAlpha Digital, I’m happy to be contributing here and look forward to being a part of your investment education and journey.
At AltAlpha, we started off 2022 by attending the prestigious Crypto Finance Conference in St. Moritz, where the global crypto community meets in the alpine resort of St. Moritz to rub shoulders with traditional finance billionaires, politicians, and wealthy individuals.
The attendees - a maximum of 250 specially-selected international investors, family offices and funds - were treated to insights on where these seasoned leaders believe the industry is headed and the areas of excitement expected in the crypto field for 2022. One clear note we walked away with was how the professional industry around crypto has been quickly developing, seen clearly by the fact that more and more traditional banks have joined the ranks of the conference’s attendees and speakers.
The buzz created by the conference was electric, but it had me wondering again about the investors looking to access crypto assets who weren’t ready to invest the majority of their wealth into it. And the field still appears too daunting for many, both technically and financially. It’s what prompted me to take a step back to review the industry and consider the crypto hedge fund option I wrote about in a recent article of ours published at GenTwo.
When looking down into the crypto rabbit hole, it will not take long for one to notice that there is more – for that matter, much, much more - out there than just BTC. Many areas across our society and economy are being revamped by this new technological revolution that offers a means of borderless and trustless interaction based on decentralized, code-enforced platforms. An entire new economy is growing, and growing fast, just as the requirement for new talent is. An engineer recently told me that while being an engineer was the top career choice in the last decade, being a game developer will be the headliner for the next (the metaverse is calling!).
Given the fast-paced opportunities (as well as pitfalls) growing in this market, it isn’t surprising that crypto funds are also rapidly growing in numbers. In conferring with our Marc P. Bernegger, he helped us to outline some of the reasons for growth and the attractiveness of crypto funds.
This still nascent industry has grown rapidly as it services the needs of investors looking for a diversified, safe, and straightforward way to participate in this transformational investment opportunity. The PwC and Elwood’s 3rd Annual Global Crypto Hedge Fund Report 2021 states that assets under management of crypto hedge funds increased to USD 3.8B in 2020 from USD 2B the year before. Most investors in these funds are high-net worth individuals (54%) or family offices (30%) with the median investment being USD 400K and the average USD 1.1M.
What makes crypto hedge funds so attractive
First, the strategy starts with the fund managers involved, their abilities and their experience. Many of these managers have spent decades in the traditional finance world running strategies using models and vast data sets, and thus, have a systematic approach to trading. This quantitative approach can be superior to human decision-making procedures given the, at times, irrational and volatile nature of the crypto market. The market is still dominated by traders making decisions by monitoring the price action on charts (e.g., technical chart analysis), which can have a self-fulfilling prophecy effect increasing the strength of trends, favoring quantitative strategies. Next to traditional price signals, traders can also retrieve specific, blockchain based data known as on-chain metrics (e.g., transaction values, miner fees, etc.). This can further enhance quantitative strategy’s predictability by combining on-chain data with technical price data.
There are additional reasons that make hedge funds attractive, including their informational market advantage, their professionalized risk management, and the hedging capabilities through, for example, derivatives such as long puts that they offer, particularly during down-markets. These funds generally trade very liquid, exchange-listed crypto assets, which provide better liquidity to investors than a fundamental venture capital type investor who targets long term early-stage projects, but then often face yearlong vesting periods.
Furthermore, the crypto space is wide and rapidly evolving, making it impossible for a single person to keep track of everything in the type of detail required. Single fund managers dive deep into specific areas such as DeFi, Gaming, NFT infrastructure, etc., and build their expertise, systems, and strategies through them. This is where “fund of funds” step in, acting as aggregators from different managers and strategies in one investment vehicle. Their multi-strategy approach to diversify risk, while having a broader exposure to the market, has given them momentum in this developing market.
Now, a new investment vehicle innovation has fuelled this growth, especially in Switzerland: AMCs (Actively Managed Certificates). No longer are these investment managers only bound to launching funds, but are also using AMCs, which allows them to launch innovative, novel solutions into the market quicker, while providing their clients with numerous benefits. The benefits include, but aren’t limited to, creating easily accessible bankable solutions which can be purchased with your existing bank via an ISIN (no additional accounts, side agreements, etc.). These strategies often have minimum entry points as low as CHF 10’000 versus most other hedge funds that normally start at USD 250’000, if not more.
In summary, the crypto space is exciting and full of possibilities. But it is also risky, volatile, and demanding if you manage everything yourself. Until this industry matures, actively managed investment solutions, like our AltAlpha Digital’s fund of funds using an AMC structure, provide for easy bankable access for investors to take a diversified position within this emerging technology.
Only 250 attendees are invited to the Crypto Finance Conference in St. Moritz, but it doesn’t mean the world of crypto and digital assets has to be restricted from the rest!