Hedge funds are increasingly dipping their toes in crypto, according to a report from the Alternative Investment Management Association (AIMA) and PwC.
Almost half (47%) of the traditional hedge funds surveyed for the report now have exposure to digital assets, up from 29% in 2023 — with that growing exposure being driven by, “increased regulatory clarity and the launch of spot cryptocurrency ETFs in Asia and the U.S.,” said the report, which was published Friday.
Additionally, the research found that hedge funds are increasingly using derivatives to get their exposure to crypto and are turning away from spot trading.
“This signals growing sophistication in hedge fund strategies,” it said.
The most popular strategies among traditional hedge funds include market-neutral and discretionary long-only strategies, the report noted.
“Market-neutral strategies are often favored for their ability to manage risk while seeking returns in the fluctuating digital assets market,” the report said. “Although discretionary long-only strategies lack the volatility dampening characteristics of market-neutral portfolios, they can capitalize on the upside potential of innovative blockchain projects or tokens.”
Funds are also using quantitative long/short and quantitative long-only strategies.
As well, the report said hedge funds are reporting that there’s growing demand from institutional clients for crypto exposures — whether the funds are already investing in crypto or not.
“The findings from this year’s report indicate a steady recovery in confidence over the past year. Institutional investors are showing renewed interest, driven by several key factors including increased regulatory clarity, such as the European Union’s Markets in Crypto-Assets (MiCA) regulation, advancements in infrastructure, and the approval of new products like spot bitcoin and ether ETFs by the U.S. Securities and Exchange Commission,” said James Delaney, managing director, asset management regulation, at AIMA, in a release.
Of the funds that already have exposure to crypto, approximately a third are planning to increase those exposures by the end of 2024, AIMA said.
At the same time, most of the funds that don’t have exposure to crypto aren’t planning to get into the sector. The report said 76% of these funds say that they are unlikely to enter the space in the next three years, which is up from 54% last year.
For funds that don’t invest in crypto, the primary barrier to getting involved is investment mandates that explicitly exclude digital assets, the report said.
The other barriers to growth include regulatory uncertainty, bad actors, quantum computing, custody issues, restaking, politics/government bans, and protocol design.
The report is based on a survey of 100 hedge funds, both traditional hedge funds and crypto-focused funds with an estimated aggregate of US$124.5 billion in assets under management.