Last year saw a giant influx of crypto hedge funds while in 2018 several have closed or failed to launch.
Earlier this month, Bloomberg reported that nine cryptocurrency hedge funds have closed this year, with only two of the top twenty-five funds reporting gains in Q1 of this year. The reality is that there’s an over saturation of crypto hedge funds with over 167 opened in 2017.
While nine of them are closing and many other planned crypto hedge funds are opting not to launch this year, it still doesn’t put a dent in the total number of funds. It does, however, reveal an interesting change in the mindset of crypto traders and investors, resulting in equally interesting solutions and new directions for some crypto hedge funds.
Why are Crypto Hedge Funds Taking a Hit?
When returns were in the thousands, throwing money into crypto hedge funds seemed like a no-brainer. This year cast doubt on the sustainability of these returns, and coupled with high fees, a 2% annual management fee and a 20% cut of the profits, many have opted to take control of their own investments rather than trust in crypto hedge funds.
Those who invest and trade in crypto are not disillusioned about investing, just in giving over full control to other people. One of the crypto funds that took a big hit according to Forbes, Alpha Protocol, relies on a community of strategists, but only about 2% of strategists are actually able to produce consistent results.
Crypto investors feel they could have produced the same results that crypto hedge funds produced last year if they had access to the same high-quality tools as those 2%. They’re straying away from the advice and predictions of people, and looking towards analytics, signals, and indicators from hard data and machine learning – methods that the most successful crypto hedge funds incorporate.
What’s Next for Crypto Hedge Funds?
Reuters reports that most gains in 2017 were from investing long, but other crypto hedge funds – such as Bitspread, and Pantera Capital – were able to protect themselves during the bitcoin downturn and even see gains incorporating a multitude of strategies.
The opportunities are very appealing, especially if you have a team that is strong on both crypto, quantitative trading, and machine learning. You can do arbitrage, long/short, etc.
– Paul Veradittakit, Pantera Capital in a SumZero Interview
While most crypto hedge funds are reluctant to repurpose their initial ideas, some are seeing the benefit in doing so.
AxionV, which caters only to serious investors, are redesigning their machine learning AI algorithms for public use as a SAAS crypto trading tool for investors of all skill levels. Doing so would open up an entirely new demographic in a smart move that makes creative use of the AI signals and trading strategies they already have in place.
Another example is the recent news of Mike Novogratz putting his crypto hedge fund plans on hold to instead launch Galaxy Digital, a crypto merchant bank with Goldman Sachs executive as his chief operating officer.
This year has seen far fewer crypto hedge funds launch, but it’s exciting to see the evolving strategies unfold with individual investors and hedge funds alike striving to beat the market.
Are hedge funds here to stay or will they die out altogether? Let us know your predictions in the comments below!
Images Courtesy of News.Bitcoin, Thomson Reuters Datastream, and Autonomous Next