Significant share of tradition hedge funds now hold crypto

Nearly half of hedge funds focused on traditional asset classes now have exposure to cryptocurrencies as increased clarity around regulations and the launch of exchange-traded funds in the U.S. and Asia draw more investors into the asset class, according to a new survey.

Among hedge funds trading in traditional markets, 47% had exposure to digital assets, up from 29% in 2023 and 37% in 2022, according to the Global Crypto Hedge Fund Report published Thursday by the Alternative Investment Management Association and PwC. Among those funds that are already invested, 67% plan to maintain the same level of capital in crypto while the rest plan to invest more by the end of 2024, the survey found. 

While many hedge funds first waded into crypto by trading tokens in the spot market, they are now increasingly deploying more sophisticated strategies. Among funds involved in crypto, 58% traded derivatives in 2024, up from 38% in 2023, while those trading in spot markets dropped to 25% this year after peaking at 69% last year, according to the report.

“The findings from this year’s report indicate a steady recovery in confidence over the past year,” James Delaney, managing director of asset management regulation at AIMA, said in an interview. “It’s really the regulatory clarity that we started to see globally. That clarity is definitely boosting confidence in the asset class.” 

With its seismic price swings, crypto tends to offer lucrative trading opportunities for funds willing to take the plunge.

“The application of traditional investment strategies can generate much higher returns in crypto given the market is less efficient,” said Edward Chin, co-founder of Parataxis Capital Management, an investment firm focused on digital assets. “Simple market-neutral arbitrage trading strategies that generate mid to high-single digits returns in traditional asset markets can yield high 20% to low 30% type returns,” he said, adding that one challenge is deploying large amounts of capital in a market that is still much smaller than traditional asset classes. 

And the opportunity set doesn’t stop at crypto tokens themselves. After all the casualties of the bear market in 2022, there are potential bargains in digital-asset companies’ debt, for example. Hedge funds including Diameter Capital Partners, Canyon Partners and Farallon Capital Management scooped up an $874.5 million obligation that bankrupt crypto exchange FTX owed to failed lender BlockFi Inc., Bloomberg reported in July.

That said, some hedge-fund managers are still on the sidelines and 76% of those not currently invested in the asset class say they are unlikely to change their minds in the next three years, up from 54% in 2023, according to the survey. The exclusion of digital assets from investment mandates is a top reason.

Two-thirds of traditional hedge funds do not plan to incorporate Bitcoin ETFs into their current digital-asset strategies, the survey found.

Of the 100 hedge funds that took part in the survey, 42% were funds that invest in traditional assets and the rest were focused on crypto. The survey was conducted in the second quarter, soon after Bitcoin hit its all-time high in March. The original cryptocurrency is trading about 18% below that record.