Hedge Funds Thrive on Volatility. That’s Why They Are Pushing Into This Asset Class.

All funds are bullish about the long-term future of digital assets, but the recent market downdraft is giving everybody pause, according to PwC and AIMA.

Erhan Demirtas/Bloomberg

Erhan Demirtas/Bloomberg

Hedge funds have reaped rewards from the unstable public markets. Now, they are setting foot in another sector with a volatile pricing trend: digital assets.

About one-third of all hedge funds are investing in digital assets this year, up from 20 percent in 2021, according to the latest crypto hedge fund report by PwC and Alternative Investment Management Association. The number of hedge funds investing exclusively in digital assets is estimated to be over 300, up by 50 percent from three years ago, according to the report, which is expected to be released on Wednesday.

PwC and AIMA based the results on a survey in the first quarter of over 70 crypto specialist hedge funds and 89 traditional hedge funds. The latter group manages a total of $436 billion in assets, with over a half managing over $1 billion. The types of digital assets that hedge funds invest in include cryptocurrencies, decentralized exchange-listed tokens, and non-fungible tokens.

Just like in the public markets, hedge funds can deploy a variety of derivatives in crypto trading. Their ability to take short positions is especially desirable in one of the most volatile asset classes, according to John Garvey, global financial services industry leader at PwC. Last month, the crypto market lost a quarter of its value in three days after the collapse of Terra, a network of interlocking digital tokens.

According to the report, over 60 percent of crypto specialist hedge funds are using derivatives in their portfolios. Thirty-four percent and 27 percent of such funds have cash-settled futures, respectively. And they delivered good returns: the median performance of crypto hedge funds was 63.4 percent in 2021, slightly above Bitcoin’s annual return of 60 percent, said PWC and AIMA.

“Some of the rules in the normal capital markets play [in the crypto space],” Garvey told II. “The increasing use of derivatives and the ability to short are [what’s needed] to deal with these volatile markets.”


Family offices and high-net-worth individuals are leaders in investing in digital assets. According to the report, 86 percent and 66 percent of crypto hedge funds have high-net-worth and family office investors, respectively. Some of these family offices were founded by hedge fund owners themselves, Garvey said. Some family offices are also investing in crypto to engage the next generation of family office leaders.

Among the surveyed traditional hedge funds, two-thirds of those that have already invested in digital assets plan to deploy more capital to the asset class by the end of the year. Multi-strategy funds, macro funds, and equity funds lead in digital asset exposure, according to the report.

“There is clear evidence of increasing uptake and usage of digital assets within traditional hedge fund strategies,” said Jack Inglis, CEO of AIMA. He added that diversification and market neutral alpha opportunities are key reasons for traditional hedge funds to invest in the crypto market.

But even with the spike of interest in digital assets, Garvey admitted that the recent crypto selloffs have given the market a “big risk-off” sentiment. “Will that continue? I think it depends on [whether] the Fed can get inflation under control and [whether] we are going to have a recession or not,” he said. “I think everyone is kind of fearing the worst. And that’s what gets priced into the markets, including crypto.”