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Crypto Hedge Funds Are Optimistic About Bitcoin. The Rest of the Industry Is Not Yet Persuaded.

Before the market’s rout, crypto hedge funds predicted that Bitcoin’s price would go up by the end of the year.

Crypto-focused hedge funds are on the rise, with assets under management nearly doubling between 2019 and 2020.  

But outside the crypto niche, most hedge funds still aren’t convinced that the asset belongs in their portfolios, a new survey from PricewaterhouseCoopers, Elwood Asset Management, and the Alternative Investment Management Association shows.  

The survey, published on Monday, comes at a time of considerable volatility in the market for digital assets. The price fluctuations in crypto, along with the release of new data in the report, reveal just how optimistic crypto hedge funds are about Bitcoin. 

Here’s why: when the survey, which was completed during the first quarter of 2021, closed, Bitcoin’s price was around $59,000.  

All but one of the survey’s respondents predicted that the price would go up by December 31, with 65 percent expecting that it would land between $50,000 and $100,000. Another 21 percent said they expected the price to end up between $100,000 and $150,000 by the end of the year.    

As of Monday midday, the price was hovering around $38,000, Coindesk data showed. If the report is correct, crypto hedge funds may help push the price of Bitcoin back up by the end of 2021. 

Crypto Appears to Lure Quants

According to the survey, which polled 45 crypto hedge funds, the total assets under management at these firms increased from $2 billion in 2019 to $3.8 billion in 2020, with high-net-worth individuals and family offices being the most common investors.   

These firms were most likely to use quantitative investment strategies for the asset class, although quant long-short strategies posted the lowest median returns (an increase of 72 percent) overall. Discretionary long-short funds had a median return of 129 percent; discretionary long-only strategies posted 294 percent median gains. 

Twenty-eight percent of respondents are actively shorting crypto assets, while 56 percent are using derivatives, and 31 percent use options, according to the survey.  

“There are a number of ways to think about hedging,” said Steve Kurz, head of Galaxy Digital’s $1.6 billion asset management business. “Diversification in some ways is a hedge. There are certainly derivatives. You have more derivatives and a deeper market than you did a year or two ago.”   

Mike Novogratz’s Galaxy has acquired crypto fund-of-funds provider Vision Hill Group. In an interview with Institutional Investor, Kurz said that “active management has started to become more interesting” in the crypto space.   

Crypto Cynic Ray Dalio Now Owns Bitcoin

On Monday, Bridgewater Associates’ Ray Dalio revealed that he owned some Bitcoin during the Consensus 2021 conference on crypto.   

A longtime crypto cynic, Dalio revealed that he now owns some Bitcoin during a panel. “He was more of a skeptic of that asset class,” said AIMA director James Delaney of Dalio. “It was interesting that he made this point.” 

Like Dalio, many typical hedge fund managers have been skeptical of cryptocurrency. The survey revealed that most of the 39 hedge fund participants, who collectively manage $180 billion in assets, haven’t followed in Dalio’s or their crypto-focused hedge fund peers' footsteps yet.  

Of the respondents, 21 percent have invested in digital assets, but their allocations to the crypto space are low, accounting for only 3 percent of assets under management on average.   

The research showed that 9 percent of respondents who have not yet invested in crypto are planning to do so in 2021, while another 17 percent are looking to invest.  

“This isn’t hedge funds going all-in on this asset class,” Delaney said. “They're being cautious. They’re doing due diligence. They’re still wary of the regulatory environment.”  

Indeed, the survey showed that 81.8 percent of respondents who have not yet invested in digital assets are worried about regulatory uncertainty. This is the most frequently cited concern, followed by client reaction, and reputational risk, which Delaney said could be connected to their regulatory concerns.  

“That is one of the barriers that could, if it were to be removed, accelerate investments in digital assets,” Delaney said.   

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