Survey of the Current Status of the Encryption Hedging Fund Industry: Asset Scale Doubles, Family Offices Become Market Makers

A recent survey report revealed the current development status of cryptocurrency hedging funds. The data shows that the assets under management (AUM) of such funds experienced significant growth in 2019, doubling from $1 billion at the end of 2018 to $2 billion.

Among various investment strategies, fully managed long-only funds performed the best, achieving an average return of 42% in 2019. It is noteworthy that family offices and high-net-worth individuals constitute the main body of encryption hedging fund investors, accounting for 48% and 42%, respectively.

The investigation found that there are currently about 150 active encryption hedging funds, of which 63% were established in 2018 or 2019. The activity level of fund establishment shows a high correlation with the price trend of Bitcoin. The rise in Bitcoin prices in 2018 stimulated the establishment of a large number of funds, while the market downtrend at the end of 2019 led to a significant decrease in the number of new funds.

The report categorizes cryptocurrency hedging funds into four main types: fully discretionary long, fully discretionary long-short, quantitative funds, and multi-strategy funds. Among them, quantitative strategies are the most popular, accounting for nearly half of the market share. The other three types of strategies each account for about 17-19% of the market share.

From the perspective of investor composition, family offices and high-net-worth individuals dominate with a total of about 90%. Traditional institutional investors such as pension funds and foundations have lower participation, while venture capital funds and funds of funds have a relatively small share in cryptocurrency investments.

The median number of investors in these funds is 27.5, with an average of 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, showing a typical "long tail" distribution characteristic.

In 2019, the performance of cryptocurrency hedging funds was generally positive, with a median increase of 74%. There were differences in performance among different strategies, with fully delegated long strategies performing the best, yielding a median return of 40%. In contrast, multi-strategy funds performed relatively weakly, with a median return of 15%.

It is worth mentioning that the development of the derivatives market has provided more investment tools and strategy options for encryption hedging funds. Surveys show that 48% of the surveyed funds hold short positions, and 56% use derivatives for trading. In terms of leverage usage, 56% of funds were allowed to use leverage in 2020, but the actual active usage rate was only 19%.

As the cryptocurrency market continues to mature, it is expected that more regulated cryptocurrency futures products will emerge in the future, which may attract more hedging funds to participate. At the same time, the further development of the derivatives market will also provide funds with more complex investment strategy options, aligning the investment strategies of cryptocurrency hedging funds with those of traditional hedging funds.