Hedge funds are ready to take on cryptocurrency? While it’s unlikely that they are, some do have a tendency to dip their toes. These toes can be enormous. In the article “Bitcoin is a Mainstream Investment Opportunity for Hedge Funds,” the Wall Street Journal does a deep dive into the phenomenon. And we get a closer look into who’s doing what and who isn’t there yet.
According to Coinbase’s numbers, “institutional investors as a whole traded $1.14 trillion of cryptocurrencies in 2021, up from $120 billion the year before, and more than twice the $535 billion for individual investors.” Those numbers blast past A survey’s predictionsNine months ago NewsBTC reported on this story:
“As per Intertrust, the results of the survey indicate that hedge funds plan to increase their crypto assets in the next five years.
An average figure based on the responses shows that by 2026, funds aim to keep $313 billion in digital assets, which is around 7.2% of their total assets.”
Why do they invest so heavily? What about the money that doesn’t think? That’s what we’re here to find out. Let’s start with a quote from Michael Botlo, who ran Quantbot:
“The crypto universe is now liquid and large enough to be tradable. Hedge funds are seeing their own investors demand that the firms get involved.”
How do they work?
Brevan Howard Asset Management is the most recent news, as well Tudor Investment Corp. (propriety of Paul Tudor Jones), which was established a few months back Bitcoin is 100 percent certain, according to some experts. How do these hedge funds work? Let’s quote the WSJ:
- “Brevan Howard launched a cryptocurrency hedge fund in January that will begin accepting outside investors. The fund is making bets on the direction of bitcoin, ether and other cryptocurrency prices, while also searching for arbitrage between currencies.”
- “Brevan Howard has a new crypto division, BH Digital, created in September, which manages over $250 million and has 12 portfolio managers.”
- “Mr. Jones has been buying cryptocurrencies to try to protect against rising inflation.”
Okay, that’s great. But, what makes these hedge funds go down this path? Galaxy Digital Holdings’ Robert Bogucki tells us, “More funds see crypto as a fifth asset class.” And then, proceeds to give us some real alpha into the hedge fund’s strategy:
“One difference from stock trading: Most hedge funds are avoiding shorting cryptocurrencies, says Mr. Bogucki, worried that these currencies might shoot up in price, leading to quick and big losses. Most funds have focused on buying tokens and trading futures, rather than playing options markets, which can be harder to trade though option activity is growing.”
BTC price chart 03/09/2022 by Bitstamp. Source: BTC/USD at TradingView.com| Source: BTC/USD on TradingView.com
Why are Hedge Funds Going This Way?
These are not the easiest reasons to be a success than many people think.
- “The crypto market is relatively new with ample “inefficiencies,” or opportunities for big firms with access to timely and accurate information to profit.”
- “The crypto market is also full of individual and inexperienced traders who often do poorly in squaring off with fast-moving funds.”
- “Wall Street firms haven’t established dominance, creating potential opportunities for new players.”
- “Traditional hedge-fund trading techniques often work in crypto, especially those focused on price and volume trends.”
But what about the Naysayers?
Some hedge funds may not be open to cryptocurrencies. The article mentions Elliott Management Corp’s Paul Singer who “has been outspoken in his skepticism of cryptocurrencies”. Also, Citadel’s Ken Griffin. It’s worth noting that Ken Griffin was outraged by bitcoinFour years ago, he made the announcement that he would be retiring. Citadel Securities will be offering cryptocurrency services. Bitcoinist reported:
“In an InterviewGriffin spoke with David Rubenstein, Bloomberg Wealth. He mentioned how the current geopolitical conflict creates remarkable down slips in volatility for the markets.
Concerning digital assets, the Citadel founder had a turnaround in his stance as he revealed the plans of his company stepping into the crypto market this year.”
But, is it really against cryptocurrency investing that these hedge funds are putting up so much resistance? The article quotes Squarepoint Capital’s Maxime Fortin saying that “there are significant regulatory hurdles.” Also, Raposa’s Agustin Lebron, who says:
“In many ways, trading crypto is analogous to other trading assets, but there are different kinds of risks. By the time you’re ready to hit the button and trade for real, the crypto world may have moved on.”
The crypto market is too volatile and not sufficiently regulated for hedge funds. You’re right, but what about the “first-mover” advantage?
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