Bitwise’s Plan to Get Crypto Into More Institutional Portfolios: A Hedge Fund of Funds
A peek inside the fund shows strategies run by Citadel and Bridgewater alumni.
The past 18 months have been brutal for the cryptocurrency industry.
Terraform Labs and its stablecoin collapsed; Three Arrows Capital and other companies filed for bankruptcy; and criminal and civil charges were filed against Sam Bankman-Fried, the founder and former CEO of FTX Group, for running a massive yearslong fraud. More recently, the Securities and Exchange Commission sued Coinbase Global, claiming it was operating as an unregistered broker-dealer.
But hedge funds remain interested in crypto — and that’s good news for Jeffrey Park, head of Alpha Strategies, a Bitwise Asset Management unit that invests in crypto hedge funds.
Park began his finance career trading exotic equity derivatives at Morgan Stanley before working for Harvard Management Company and Corbin Capital Partners, a multi-strategy hedge fund. He joined Bitwise early last year to lead a small group centered on helping more institutional investors invest in the young asset class.
He asked himself at the time: “How can we invest in crypto, but do it in a way that has lower volatility, lower correlation, lower beta — driven by absolute return in a way that can push out the efficient frontier of someone’s modern portfolio in their endowment model, and deliver another degree of freedom to think about broadening the mandate of what an absolute return bucket could deliver?”
The best way to do that, he determined, was through a fund of crypto hedge funds.
Pension funds, endowments, and other big investors have expressed interest in crypto, but it’s tough for them to get the exposure they want, Park explained. They don’t like Bitcoin’s volatility and they don’t want to dedicate time and resources attempting to become crypto experts so that they can choose managers or generate alpha themselves. But they are interested in a turnkey way to get less correlated, market-beating returns in the asset class.
The Bitwise Multi-Strategy Alpha Fund is an all-weather strategy that targets “exceptional risk-adjusted returns across crypto cycles” and aims for a beta exposure to Bitcoin of 0.2 to 0.3, with one-third the volatility.
The fund’s performance hasn’t been stellar so far. After launching in November, it finished 2022 down 2.27 percent. So far in 2023, it’s up only 1.94 percent. (Bitcoin is up 76 percent so far this year.)
The Bitwise fund is currently invested in 10 hedge funds running a variety of crypto strategies, including event-driven, directional, liquid venture, arbitrage, yield, and quant. The fund can also allocate up to 20 percent of its assets to opportunistic direct investments and a portfolio hedging overlay, according to marketing materials reviewed by Institutional Investor.
(The Alpha Strategies group also helps investors build custom multi-strategy solutions through its platform.)
Park declined to share which hedge funds Bitwise has partnered with, but he described them as established firms and leaders in the space. The firms are founded by or employ investment professionals including a former Citadel executive with “one of the most compelling track records of high frequency trading,” and a team of former Bridgewater traders, among others, Park said.
“The specialists that we want to partner with have a wide ranging experience, both from a traditional pedigree as well as having crypto native expertise and experience” Park said. ”But the most important factor would be an overly zealous focus on risk management. Risk management is the most important thing in crypto.”
In the future, Park said he would like to see the group of hedge funds included in the Bitwise strategy grow to 15 or 20. But finding, evaluating, and choosing the right managers is especially hard in crypto.
“Crypto is still a very early and nascent market for there being a unified framework for valuation by different groups of investors. Your perspective of how you might value a crypto token may be entirely unique and that makes it hard to know if the valuation approach that an investor is leveraging is ultimately going to drive value,” Park said.
He is following some emerging strategies, and noted that there is still a lot of low hanging fruit that institutional investors can appreciate, such as momentum and trend following.
And the universe of hedge funds to choose from is bigger than some investors might realize.
The portion of traditional hedge funds investing in crypto assets fell to 29 percent from 37 percent last year. However, the traditional hedge funds still invested in them are increasing their average allocation from 4 percent to 7 percent, according to a July report by PwC and the Alternative Investment Management Association. Additionally, there are at least 131 crypto-native hedge funds (the number surveyed by PwC) running numerous investment strategies.
Institutional investors know that where there is volatility, complexity, and inefficient market structures, there is an opportunity to generate alpha. They have capitalized on that across all kinds of alternative investments — often with low liquidity being a drawback, Park explained.
“What if I told you that there’s another thing that can do all of these things, and push out your efficient frontier, but it also happens to be liquid?” Park said. “That is crypto.”