Encryption Hedging Fund Survey: Family Offices and High Net Worth Individuals are the Main Investors

A recent survey report revealed the investment situation of family offices and high-net-worth individuals in the encryption market. The report shows that the assets under management of cryptocurrency-focused hedging funds increased significantly in 2019, rising from $1 billion at the end of 2018 to $2 billion.

In 2019, the fully delegated long-only funds performed the best, with an average return of 42%. In terms of funding sources, family offices accounted for 48% of hedge fund investors, while high-net-worth individuals accounted for 42%.

An industry expert said: "Since the COVID-19 pandemic, we have observed that people's interest in encryption has become more widespread."

Fund Establishment Time and Strategy

Surveys show that there are about 150 active encryption hedging funds, of which nearly two-thirds (63%) were established in 2018 or 2019. The activity of fund establishment is highly correlated with the price of Bitcoin. The surge in Bitcoin prices in 2018 seems to have driven a wave of cryptocurrency fund creation.

The report categorizes cryptocurrency hedging funds into four types:

1. Full authorization long position: only going long, with a longer investment period, tending to invest in early-stage projects.

2. Full discretionary long and short: Covers various strategies, including long and short, relative value, event-driven, etc.

3. Quantitative Fund: Uses quantitative investment methods, strategies include market making, arbitrage, etc.

4. Multi-strategy: Combine the above three strategies.

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

Investor Composition

The investigation found that family investment institutions ( 48% ) and high-net-worth individuals ( 42% ) are the main investors, accounting for a total of 90%. Surprisingly, pension funds, foundations, and endowments have a very small proportion in cryptocurrency investments, and the participation of traditional venture capital funds and funds of funds is also low.

The median number of investors in cryptocurrency hedge funds is 27.5, and the average is 58.5. The median investment size is $300,000, and the average is $3.1 million. About two-thirds of cryptocurrency hedge funds have investment sizes below $500,000.

Asset Management Scale

The report estimates that in 2019, the global assets managed by encryption hedge funds exceeded $2 billion, doubling compared to 2018. The distribution of asset management size shows a Matthew effect, with a few funds managing most of the assets.

Compared to 2018, the asset management scale achieved a leap in 2019. The proportion of encryption hedging funds with asset management scales exceeding 20 million USD increased from 19% in 2018 to 35% in 2019.

Performance

The sudden cooling of the encryption market in 2018 led to an average performance of -46% for hedge funds. However, by the end of 2019, the median increase in performance of encryption hedge funds reached 74%.

Classified by investment strategy, the fully discretionary long funds performed the best in 2019, with a median performance of 40%. This was followed by the fully discretionary long-short (33%) and quantitative funds (30%), while multi-strategy funds performed the worst (15%).

It is worth noting that Bitcoin rose 92% in 2019, surpassing all encryption hedging funds. This indicates that these funds act more as tools for reducing market volatility rather than as catalysts for increasing returns.

Investment Tools and Strategies

With the development of the derivatives market, encryption hedging funds are adopting more complex investment strategies. About 48% of the surveyed funds hold short positions, and 56% use derivatives. About one-third of the funds are involved in futures and options trading.

In leveraged trading, 56% of cryptocurrency hedging funds used leverage in 2020, an increase from 36% in 2019. However, the proportion of funds that actively used leverage was only 19%.

In the future, as more regulated encryption futures products emerge, it is expected that more cryptocurrency hedging funds will enter this field. However, due to factors such as increased financing difficulties and risk aversion, the extent of growth in leverage usage remains uncertain.