Encryption Hedging Fund Development Trend Report: Asset Size Doubles, Investors Mainly from Family Offices

A recent survey report revealed the latest development trends of cryptocurrency hedging funds. The report shows that in 2019, the assets under management (AUM) of cryptocurrency hedging funds grew significantly, rising from $1 billion at the end of 2018 to $2 billion.

In the overall performance of 2019, fully discretionary long funds stood out, with an average return of 42%. It is worth noting that family offices and high-net-worth individuals are the main sources of funding for encryption hedging funds, accounting for 48% and 42% of investors, respectively.

An industry expert pointed out, "Since the outbreak of the COVID-19 pandemic, we have observed a more widespread trend in people's interest in encryption currency."

Surveys show that there are currently about 150 active encryption hedging funds, of which nearly 63% were established in 2018 or 2019. The number of encryption funds established is highly correlated with the price trend of Bitcoin. The surge in Bitcoin prices in 2018 seems to have stimulated the emergence of a large number of encryption funds, while as the encryption market entered a downward channel at the end of 2019, the number of newly established funds also significantly decreased.

The report categorizes encryption hedge funds into four major types: fully discretionary long, fully discretionary long-short, quantitative funds, and multi-strategy funds. Among them, quantitative funds are the most common, accounting for about half of the market share. The other three types of strategies each account for approximately 17-19% of the market share.

From the perspective of investor composition, family offices and high-net-worth individuals account for nearly 90% of all investors. In contrast, pension funds, foundations, and donor-advised funds have a very low participation rate in encryption investment. The investment proportion of traditional venture capital and fund of funds in this area is also relatively small.

The average number of investors in these funds is 58.5, with a median of 27.5. The median average investment size is $300,000, while the average reaches $3.1 million. About two-thirds of the encryption hedging funds have an investment size of less than $500,000.

The distribution of asset management scale shows a significant Matthew effect, where a few large funds manage most of the assets, a characteristic similar to the traditional hedge fund industry. In 2019, the proportion of encryption hedge funds with an asset management scale exceeding 20 million USD increased from 19% in 2018 to 35%.

In terms of performance, the median return of encryption hedging funds in 2019 reached a 74% increase, while the average performance in 2018 was -46%. By strategy classification, the fully discretionary long-only funds had the highest median return in 2019, reaching 40%, followed by fully discretionary long-short (33%) and quantitative strategies (30%), while multi-strategy funds performed relatively weakly at 15%.

It is worth noting that Bitcoin's 92% increase in 2019 surpassed the performance of all encryption hedging funds. This indicates that encryption hedging funds serve more as tools to reduce market volatility rather than as catalysts for enhancing returns.

With the development of the cryptocurrency derivatives market, the investment strategies of cryptocurrency hedge funds are becoming increasingly complex. Surveys show that 48% of the surveyed funds hold short positions, and 56% use derivatives. About one-third of the funds participate in futures and options trading. In terms of leverage usage, 56% of funds reported using leverage in 2020, but only 19% actively engage in leveraged trading.

In the future, as regulated encryption futures products increase, it is expected that more encryption hedging funds will enter this field. However, due to the increasing difficulty of obtaining debt financing, the outlook for the growth of leverage usage remains unclear.