According to a Bloomberg reportA recent survey found that almost half of traditional hedge funds have some exposure to cryptocurrencies, with the level of exposure expected to increase by the end of the year.
Traditional hedge funds venturing into crypto
A survey conducted by the Alternative Investment Management Association (AIMA) and PwC found that 47% of traditional hedge funds now have some level of exposure to digital assets. This is a notable increase from 37% in 2022, but a decrease from 29% in 2023.
Of the hedge funds that have already invested in digital assets, approximately 67% plan to maintain their current capital levels in crypto, while the remainder are expected to increase their allocation by the end of 2024.
The report highlights a shift in hedge funds’ investment strategies, from trading tokens on the spot market to more advanced strategies such as derivatives trading.
For example, in 2023, 38% of hedge funds surveyed were trading digital asset derivatives. This figure increased to 58% in 2024. Conversely, the percentage of hedge funds trading on spot markets fell from 69% in 2023 to 25% in 2024.
A key driver behind the increase in cryptocurrency exposure is increasing regulatory clarity launch of crypto exchange-traded funds (ETF) in the US and Asia. James Delaney, director of asset management regulation at AIMA, comments:
The findings from this year’s report indicate a steady recovery in confidence over the past year. It’s really the regulatory clarity that we started to see globally. This clarity certainly increases confidence in the investment category.
While digital assets remain volatile, their sharp price movements offer attractive trading opportunities for funds with a higher risk tolerance.
Edward Chin, co-founder of Parataxis Capital Management, emphasized that traditional investment strategies can help investors make outsized profits as the crypto market is “less efficient.”
By “less efficient,” Chin likely means that the crypto market has more information gaps, price gaps, and volatility compared to traditional markets. This allows experienced investors to take advantage of these inefficiencies to generate higher returns using proven investment strategies.
Some hedge fund managers are still hesitant about cryptocurrencies
Despite the encouraging research results, some hedge fund managers continue to steer away from digital assets. 76% of hedge funds that currently hold no digital assets say they are unlikely to change their minds in the next three years, up from 54% in 2023.
For some, the current regulatory framework for digital assets is still too immature to justify adding them to their portfolios. For example, Nasdaq in July 2023 stopped its plans to launch a crypto custody business, citing regulatory uncertainty surrounding the emerging asset class.
In related news: a recent study in Japan found that the majority of institutional investors are willing to invest in digital assets within the next three years. BTC is trading at $61,034 at the time of writing, down 1.5% in the last 24 hours.
Featured image from Unsplash.com, chart from TradingView.com