The market size of encryption hedging funds surges, with family offices and high-net-worth individuals becoming the market makers.

A recent survey report revealed the fund management situation of family offices and high-net-worth individuals in the encryption market. Data shows that the asset management scale of hedge funds focused on cryptocurrency (AUM) saw significant growth in 2019, jumping from $1 billion at the end of 2018 to $2 billion.

The best performer in 2019 was the discretionary long-only fund, with an average return of 42%. In terms of funding sources, family offices and high-net-worth individuals accounted for 48% and 42% of hedge fund investors, respectively, becoming the main sources of capital.

An industry expert stated: "Since the outbreak of the pandemic, we have observed a broader interest in encryption among people."

Emerging funds dominate, four major strategies coexist

Research shows that as of the first quarter of 2020, there were about 150 active encryption hedging funds, of which nearly two-thirds (63%) were established in 2018 or 2019. The activity level of fund establishment is highly correlated with the price trend of Bitcoin, with the surge in Bitcoin prices in 2018 being an important factor driving the creation of cryptocurrency funds.

The report categorizes cryptocurrency hedging funds into four major categories:

1. Full authorization to go long: Focus on long-term investment, inclined to invest in early-stage projects and highly liquid encryption currencies.

2. Full discretionary authorization for long/short: covering various strategies, including long and short, relative value, event-driven, etc.

3. Quantitative Funds: Use directional or market-neutral quantitative investment methods, focusing on highly liquid encryption currencies.

4. Multi-strategy: A combination of the above three strategies.

Among them, quantitative funds are the most common, accounting for nearly half of the market share. The other three strategies each account for about 17-19%.

The investor structure is homogeneous, and the scale distribution is uneven.

The survey shows that family investment institutions ( account for 48% ) and high-net-worth individuals account for 42% (, making them the main investor groups, with a share of up to 90%. Surprisingly, pension funds, foundations, and endowments have almost no participation in cryptocurrency investments, and the participation of traditional venture capital and funds of funds is also relatively low.

The median number of fund investors is 27.5, and the average is 58.5. The median average investment size is $300,000, and the average is $3.1 million. About two-thirds of encryption hedging funds have an investment size of less than $500,000.

In 2019, the global assets managed by cryptocurrency hedging funds were estimated to exceed $2 billion, doubling compared to 2018. The distribution of asset management scale showed a Matthew effect, with a small number of large funds managing most of the assets. The proportion of cryptocurrency hedging funds with assets under management exceeding $20 million rose from 19% in 2018 to 35% in 2019.

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Performance differentiation, widespread application of derivatives

In 2019, the median performance of cryptocurrency hedging funds increased by 74%, while the average performance in 2018 was -46%. Classified by strategy, fully delegated long funds performed the best in 2019, with a median performance of 40%; followed by fully delegated long-short )33%( and quantitative strategies )30%(; multi-strategy funds performed relatively weakly, with a median of 15%.

It is worth noting that Bitcoin rose by 92% in 2019, outperforming all encryption hedging funds. These funds seem to act more as tools for reducing market volatility rather than catalysts for increasing returns.

In terms of investment tools, about half of the ) 48% ( surveyed funds hold short positions, and 56% use derivatives. Among them, about one-third of the funds participate in futures and options trading. The proportion of funds using leveraged trading rose to 56% in 2020, but only 19% actively used it.

As the encryption derivatives market becomes increasingly diversified and liquidity improves, it is expected that more crypto hedge funds will enter this field in the future, and their investment strategies will become more similar to those of traditional hedge funds.

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