Crypto Hedge Funds
Hedge funds dedicated to Crypto trading have thrived over the last few years. Here is what the leaders in the market are doing.
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While it is easy enough for an institutional or high net worth investor to open an account and buy Crypto with an exchange like Coinbase or FTX, many do not want to make their own investment decisions and prefer instead to hire a manager to do this for them. This had spurred the growth of dedicated Crypto hedge funds who are taking long and also short positions in the sector. While still a small asset class, returns have been spectacular, and managers are attracting new money rapidly.
In May 2021, PwC published their 3rd Annual Global Crypto Hedge Fund Report. They surveyed over 100 fund managers and reported that the industry nearly doubled in size to $3.8Bn in AUM. The median fund in their survey scored an astonishing +128% return in 2020. However, this dramatically lagged the return of just holding $BTC which was up 438% in 2020. Hopefully these funds delivered their strong returns with lower volatility than the underlying Crypto markets.
Most of these funds used either quantitative strategies or traded with a long/short focus, so they were likely less correlated to $BTC. I have spoken to several managers that focus on buying small to midsized coins with hopes to outperform Bitcoin. Some are running these long only, while others are shorting $BTC or $ETH to cut volatility. Given the huge runup in prices of many of these tokens, it is common to hear 10X returns from smaller funds in 2021. Another large class of Crypto funds are liquidity providers to the trading exchanges, both centralized and decentralized.
Some of the bigger hedge funds to know are Polychain Capital, Pantera Capital, and Digital Currency Group. All of these and most of the other big Crypto hedge fund managers do more than just invest in tokens. Most have launched venture funds to invest in startups in the sector, either via coin offerings or traditional equity. I’ll be doing an in-depth review of the Crypto VC market in an upcoming post, so I won’t spend much time on that here.
Polychain Capital is based in San Fran, and recent SEC filings show they have about $2Bn in AUM. Polychain is led by Olaf Carlson-Wee, an early Coinbase employee. They run token trading strategies and also have invested in 100+ startups including Coinbase and Bitclout.
Pantera Capital is also based in the Bay area and sports $5Bn in AUM. Pantera is captained by Dan Morehead, a former Wall Street trader who later ran Macro Trading for hedge fund giant Tiger Management. Like Polychain, Pantera also has a big venture portfolio with over 150 investments including Gemini, Bakkt, and Alchemy.
Digital Currency Group is an interesting organization. Barry Silbert is their CEO, and they are based out of Stamford, CT. Silbert previously founded SecondMarket and sold it to the NASDAQ in 2015. DCG owns the Grayscale asset manager, who offers a suite of Crypto ETFs. They own the Genesis Crypto prime broker, a leading news service Coindesk, a mining advisory firm called Foundry, and the Luno exchange. They have made 250+ startup investments including Circle and Ledger.
To date, there have not been announced dedicated Crypto funds from any of the massive hedge fund managers like Bridgewater, Renaissance, or Tiger. However, this is a mostly private market so they could have done so quietly. Either way, it is only a matter of time before these major players get into the game as part of their main fund or with new focused offerings. Back in 2017, Citadel leader Ken Griffin was a vocal Crypto critic. At that time, he said Crypto had “many of the elements of the tulip bulb mania” and “I get very worried that people that are buying bitcoins don’t really understand what they’re participating in.” In a major change, Griffin last week said, “It’s fair to assume that over the months to come, you will see us engage in making markets in cryptocurrencies.” He won’t be the last bear turned bull as the Crypto markets mature. I expect hedge funds to be the entry point to Crypto for many pension funds and endowments over the next year or two.