How do traditional entrepreneurs understand encryption funds?

Written by: Shao Jia Dian

Notice before reading: This article is based on an international legal perspective and does not target or apply to the legal environment of mainland China.

Over the past year, I've heard more and more often from traditional entrepreneurs, “I don't understand the crypto market, but I want to understand what crypto funds are all about?”

Some people are looking to diversify their assets; some are looking to hedge against currency fluctuations; and some simply feel that “since institutions have started investing, I can't ignore it.”

But as soon as they opened the fund materials, the bosses were immediately intimidated by various terminologies:

Long Only?

Market Neutral?

Funding Rate?

Multi-Strategy ？

Web3 VC?

CTA? Factor Model?

More importantly:

What are these strategies actually doing? Which one is stable? Which one has a large drawdown? Who made money in the past five years?

This article is written for you:

Tell you how to classify crypto funds in the most intuitive language.

What does each strategy rely on to make money?

What are the strengths and weaknesses?

What has been the real performance trend over the past five years?

How should entrepreneurs choose cryptocurrency funds?

After reading, you can basically judge:

“Whether you are suitable for investing in cryptocurrency funds and which type is suitable for you.”

Why are more and more traditional entrepreneurs starting to look at crypto funds?

The reason is actually very simple: cryptocurrency funds have transitioned from being a “playground for speculators” to an asset class recognized by institutions. Three major trends are occurring:

Trend 1: Global institutions are quietly “increasing their positions” in cryptocurrency.

BlackRock and Fidelity have issued Bitcoin / Ethereum ETFs.

JPMorgan, Deutsche Bank, and others are beginning to enhance crypto-related custody.

Sovereign funds, pension funds, and insurance capital are beginning to allocate digital assets.

When institutions enter the market, the position of crypto assets has changed. They are no longer a fringe activity, but rather a part of alternative assets.

Trend 2: Crypto funds are much more professional than individual traders.

The cryptocurrency market is highly volatile, trading 24/7, with complex derivatives and rapid innovation.

But for professional teams, this is not a problem, but an opportunity:

Clear trend signals → Suitable for quantitative analysis

Exchanges are decentralized → there is room for arbitrage

Perpetual contract mechanism → There is funding rate income

Short innovation cycles → steep VC returns

Data Transparency → Verifiable Strategies

Therefore, crypto funds can do much more than ordinary investors.

Trend Three: Entrepreneurs' asset allocation requires a “new carrier”.

The real estate cycle is weakening, A-shares are in long-term fluctuations, Hong Kong stocks have low valuations, and while the interest rates on dollar assets are high, the future is uncertain.

Many bosses are asking now:

Where will the growth come from in the next five years?

Cryptocurrency funds offer a new possibility:

Can attack (eat trend)

Defensible (Arbitrage)

Can bet on innovation (VC)

The degree of institutionalization is rapidly increasing.

Custodial, Auditable, Compliant

This is why the crypto foundation has become a new option for entrepreneurs' asset allocation.

Six Major Types of Crypto Fund Strategies

The following six categories are the most commonly used and easiest for entrepreneurs to understand in the current industry (based on Crypto Fund Research + Galaxy VisionTrack):

1. Subjective Long Only - Betting on cycles, riding the big trend

How to make money?

Buy mainstream crypto assets (BTC, ETH, top altcoins), hold long-term, and accumulate on dips.

The core logic can be summed up in one sentence:

“Believe in the long-term rise of cryptocurrency and hold on to it.”

Advantages:

The highest returns are in a bull market.

Simple and transparent, low cost

Disadvantages:

The bear market retracement is very deep.

Requires an extremely high risk tolerance

Suitable for: investors willing to bear volatility and look at long-term trends.

2. Subjective Long/Short - Can trade both up and down, trading skills are crucial.

How to make money?

Rely on the team's judgment of the market:

Bullish → Increase Position

Bearish → Reduce positions or short sell

Event-driven → Catching trends, airdrops, upgrades

Simply put: “Professional traders help you manage your positions.”

Advantages:

Hedge when falling

The fluctuation is smaller than the long position.

Disadvantages:

Success or failure highly depends on the trading team.

Identifying ability is the core competitiveness.

Suitable for: Those who want to eat the market but are afraid to go completely naked.

3. Quantitative Directionality (Quant) - The model decides, emotions take a back seat.

How to make money?

Run transactions using mathematical models:

Trend CTA

Momentum Strategy

Multi-factor model

Statistical characteristic signals

You can understand it as:

“Robot trading, no news, no emotional betting, only according to the model.”

Advantages:

Strong discipline

Returns are good when the trend is clear

Fewer human errors

Disadvantages:

The model may suddenly fail.

Transaction cost sensitive

Suitable for investors who want “more stable trend returns.”

4. Market Neutral / Arb - One of the strategies with the lowest directional risk.

How to make money?

Construct a portfolio that does not bet on price fluctuations, earning price differences and interest rate spreads.

Typical Strategy:

Funding Rate Arbitrage

Spot - Perpetual Basis Arbitrage

Cross-exchange price difference

Market Making

On-chain low-risk yield strategy

You can understand it as:

“Cryptocurrency Fund + Arbitrage Fund.”

Advantages:

Lowest volatility

Minimum risk

Minimum Pullback

Disadvantages:

The upside potential is limited

The risk lies with the counterparty (exchange) and on-chain technology.

Suitable for: Companies' idle funds, entrepreneurs who need stable returns.

5. Crypto VC (Venture / SAFT) - Betting on Innovative Bullets

How to make money?

Invest in early-stage Web3 projects, relying on:

The equity appreciation brought about by project growth

Token Generation Event

Exit at a secondary market premium after the token is unlocked

Similar to traditional VC, but with a shorter cycle and greater volatility.

Advantages:

A big project eats up all the costs

Master the future direction of the industry

Disadvantages:

low survival rate

Long lock-up period

Valuation is not transparent

Suitable for: Large funds that want to bet on tracks and gamble on innovation.

6. Multi-Strategy - Combining several advantages together.

Do at the same time:

Long position

Quantitative

Arbitrage

VC

Event-driven

Purpose:

“Pursuing comprehensive returns under controllable risks.”

Advantages:

The pullback ratio is smaller than the long position.

The yield is higher than arbitrage.

Disadvantages:

Complex structure

High management capability requirements

Suitable for: Entrepreneurs who are new to crypto funds and want to enter the market steadily.

Summary: The advantages and disadvantages of the different strategies mentioned above are summarized as follows:

The real profit logic of crypto funds

Why is the crypto market suitable for funds to develop strategies? Because it has three structural characteristics that traditional markets do not have:

1. Perpetual Contract Mechanism → Funding Rate Arbitrage Opportunity

Perpetual contracts are a unique structure in the cryptocurrency market.

Every 8 hours, long and short positions have to pay each other “interest” (funding rate).

This means:

“As long as the market is bullish, the bulls pay, and the bears collect money.”

You can use the fund:

Spot buying

perpetual shorting

Come to “lock in the price” and only earn the funding rate.

This is the most stable source of income from cryptocurrency arbitrage.

2. Multiple Exchange Structure → Natural Price Difference Opportunities

Due to:

Many exchanges

Liquidity Fragmentation

Aesthetics and preferences differ.

The stablecoin system is not unified.

There are often price discrepancies between different exchanges.

The fund is conducted through algorithmic trading:

cross-exchange arbitrage

Spot-Futures Arbitrage

Futures – Perpetual arbitrage

This type of profit does not rely on “betting on direction,” but on “mathematics and speed.”

3. High volatility → Trend strategies are more effective

In a highly volatile market:

The trend is more evident.

The signal is clearer

Quantitative models are more “well-fed”.

This is an important reason why crypto quantification can rise.

Performance of various strategies over the past five years

According to VisionTrack Crypto Hedge Fund Indices, the annual returns recorded in the past five years are as follows:

Based on a summary of publicly cited index trends in the industry, we summarize the returns of six types of strategies as follows:

1. Subjective long position: the most vigorous rise and the most severe drop.

Bull Market: Best performance (such as 2017, 2020–2021, 2023)

Bear Market: Maximum Drawdown (e.g. 2018, 2022)

High elasticity, high volatility, high returns, high risks.

2. Quantitative Directionality: Moderate to High Returns, Controllable Drawdown

Bull Market: Can Eat the Trend

Bear Market: Model to Cut Positions to Reduce Losses

The curve is smoother, suitable for those who want to “steadily follow the trend.”

3. Market Neutral Arbitrage: The most robust type of strategy

Overall characteristics:

Annualized returns may not be high, but they are stable.

Minimum Pullback

Suitable for asset backing or company cash management

The past trends in the industry are very clear:

“Steady, steady, steady.”

4. Encrypted VC: Extremely Differentiated Returns

The top funds have an astonishing IRR (hitting one or two super projects).

The median fund performance is relatively mediocre.

Long cycle, high risk, high uncertainty

Suitable for long-term capital, not suitable for short-term expectations.

5. Multi-strategy funds: The combination most easily accepted by entrepreneurs

Stable, balanced, controllable, suitable for entry-level configuration.

How should traditional entrepreneurs choose crypto funds?

Many bosses' first reaction is: “Which one should I choose?” In fact, you should first ask yourself three things:

1. Is this money “spare money” or “money that you need to use”?

Spare money → Market neutral, multi-strategy

Plan to appreciate but can withstand fluctuations → Quantitative, long position

Plan to bet on innovation → VC

The nature of money determines the strategy, not the strategy that determines money.

2. How much volatility can you accept?

A long multi-fund with a maximum drawdown of -70%, can you accept it?

If not, then this type of strategy is not suitable for you.

3. What you really want is: stability, balance, or an outburst?

Three paths:

Stable: Arbitrage / Market Neutral

Balance: Multi-Strategy / Quantitative

Outburst: Subjective Long Position / VC

Clarify your goals before selecting a fund.

Cryptocurrency funds are becoming the next generation of hedge funds.

The cryptocurrency market today is no longer the wilderness of 2018:

There is an ETF

Custody

Has audit

Regulated

There are large institutions.

There are industrial applications landing.

There is a mature strategy system.

Crypto funds do not represent speculation, but rather “a window of opportunity for a new generation of asset management strategies.” In the next five years, crypto funds will become increasingly important in entrepreneurs' asset allocation systems. Not because it is mysterious, but because it has become mainstream. If you want to understand the crypto industry, you do not necessarily have to trade cryptocurrencies yourself. You just need to understand: who is using what strategy, and under what logic they are making money for you.

Still entangled, feeling uncertain, what should I do?

If you see this, it means you have a basic understanding of the strategic logic of crypto funds. But the real challenge is not to “understand the concept,” but rather:

Which funds are worth investing in?

What strategies are suitable for the nature of your assets?

What documents, structures, and “subtle clauses” in the fee design will affect your future exit?

Which risks are controllable, and which are structural risks?

Which teams are truly institutionalized, and which are just “retail investors in institutional disguise”?

These questions don't have standard answers, but they are directly related to the safety of your funds and the stability of returns. I have seen many entrepreneurs struggle with choices and have accompanied numerous LPs in conducting due diligence on funds, structural breakdowns, clause modifications, and risk warnings. I have noticed a pattern:

As long as you clarify the strategy, structure, and terms before investing, your experience in the crypto fund will be significantly better.