Cryptocurrency Hedge Funds? There’s an Index for That

HFR has debuted investable indexes that will offer exposure to hedge funds investing in the likes of Bitcoin and blockchain technology.

Cryptocurrency mining machines (Andrey Rudakov/Bloomberg)

Cryptocurrency mining machines

(Andrey Rudakov/Bloomberg)

Hedge fund tracker HFR has launched two investable indexes to capture what the firm described as “meteoric” performance by hedge funds investing in blockchain technology and cryptocurrencies.

The indexes, which currently reflect a universe of over 20 hedge funds, include the HFR Blockchain Composite Index, based on funds that invest directly in blockchain infrastructure, cryptocurrency, and other blockchain innovations, and the HFR Cryptocurrency Index, a sub-index of the blockchain composite that focuses specifically on funds trading directly in cryptocurrencies like Bitcoin and Ethereum. Both will be investable through tracker funds operated by HFR’s asset management group.

“Investor interest in funds offering exposure to blockchain technologies and cryptocurrencies has surged in recent months as these innovations continue to move towards the mainstream and generate compelling opportunities for investors, portfolio managers, traders, and other market participants,” said HFR president Kenneth Heinz in a statement announcing the new indexes.

The launch comes days after the Cboe Futures Exchange introduced the first Bitcoin futures contacts, seen as pathway to Bitcoin trading for institutional investors who had shied away from the volatile and unregulated electronic currency.

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With performance data going back to 2015, HFR said its indexes have earned triple-digit annualized returns since inception, driven in part by “stratospheric” cryptocurrency price increases this year. Bitcoin, for example, is up more than 16-fold since the beginning of 2017, trading at around $16,500 Wednesday after starting the year below $1,000.

HFR’s blockchain index reported annualized returns of 282 percent since 2015, boosted by a “meteoric surge” of 1,522 percent in 2017 through November. The cryptocurrency sub-index similarly reported annualized returns of 292 percent since inception, with year-to-date performance of a whopping 1,641 percent.

“While the recent performance has been exciting, trading and investing in these evolving areas requires specialized expertise and involves substantial volatility and risks, both real and structural,” Heinz said in the statement. “Taking these risks into consideration, it is likely that the evolving fundamental disintermediation of traditional payment processing associated with blockchain and cryptocurrencies will continue to grow in an absolute sense and as a component of hedge fund exposures.”

The crypto funds currently tracked by HFR operate primarily macro strategies such as fundamental and systematic trend-following approaches, but the indexes also include arbitrage and momentum strategies. HFR said it expects its universe of hedge funds to “expand rapidly” in 2018, given the “explosive” growth in the sector. According to fintech data firm Autonomous Next, at least 99 new crypto funds were launched in 2017 alone.