Encryption Hedging Fund Market Development Status and Trend Analysis

A recent survey report revealed the investment situation of family offices and high-net-worth individuals in the encryption market. The data shows that the assets under management (AUM) of cryptocurrency hedging funds saw significant growth in 2019, jumping from $1 billion at the end of 2018 to $2 billion.

In 2019, fully delegated long funds performed the best, achieving an average return of 42%. Notably, family offices and high-net-worth individuals became the main sources of funding for cryptocurrency hedging funds, accounting for 48% and 42%, respectively.

Industry experts point out that since the outbreak of the COVID-19 pandemic, people's interest in encryption has shown a more widespread trend.

Development Overview of Encryption Hedging Funds

The survey shows that as of the first quarter of 2020, there are about 150 active cryptocurrency hedging funds, with 63% established in 2018 or 2019. The activity level of fund establishment is highly correlated with the price trend of Bitcoin, with the surge in Bitcoin prices in 2018 being the main factor driving the establishment of cryptocurrency funds.

Cryptocurrency hedging funds are mainly divided into four types of strategies:

1. Full power of attorney to go long
2. Full authorization to go long/short
3. Quantitative Fund
4. Multiple Strategies

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

Investor Structure and Capital Scale

The investigation found that family investment firms and high-net-worth individual investors make up the vast majority of encryption hedging fund investors, accounting for as much as 90%. In contrast, the participation of pension funds, foundations, and endowment funds in cryptocurrency investments is extremely low, and the involvement of traditional venture capital funds and funds of funds is also relatively small.

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

In 2019, the global assets managed by encryption hedging funds were estimated to have exceeded $2 billion, doubling from $1 billion in 2018. The distribution of asset management sizes shows a clear Matthew effect, with a few large hedging funds managing most of the assets.

Performance and Investment Strategy

In 2019, the median performance increase of encryption hedging funds reached 74%, compared to -46% in 2018. Fully delegated long-only funds performed the best in 2019, with a median performance of 40%. In contrast, the median performance of multi-strategy encryption hedging funds was 15%, which was relatively weak.

It is worth noting that Bitcoin's 92% increase in 2019 outperformed all encryption hedging funds. This may be related to the 2018 encryption bear market and the failure to fully capture the market's upward trend in 2019.

Derivatives and Leverage Trading

With the development of the encryption lending market, flash loans and interest rate arbitrage trading are becoming increasingly popular. The diversification of the derivatives market and enhanced liquidity make it easier for cryptocurrency hedge funds to hold short positions, thereby executing more complex investment strategies.

Surveys show that nearly half (48%) of the surveyed hedge funds have short positions, and more than half (56%) use derivatives. About one-third of the encryption hedge funds are involved in futures and options trading products.

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

In the future, as regulated encryption futures products increase, it is expected that more encryption hedge funds will enter this field. Nevertheless, due to the increasing difficulty of obtaining debt financing and inherent risks, there remains uncertainty regarding the significant growth of leveraged trading.

Overall, the encryption hedging fund market is gradually maturing, with increasingly diversified investment strategies, but it still faces many challenges and opportunities.