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Are Cryptocurrencies on Their Last Legs? Hedge Fund Managers Certainly Don’t Think So.

Hedge funds are increasingly turning their attention to digital assets, after witnessing a cryptocurrency bloodbath in the second quarter.

Thirty-two percent of hedge fund managers think that digital assets will offer the largest alpha-generating opportunity over the next three years, topping equities (18 percent) and fixed income (15 percent), according to the latest report from SigTech, a quantitative technologies provider. Twenty-three percent of hedge fund managers plan to dramatically increase their allocations to digital assets, while 60 percent plan to increase slightly. 

SigTech based the results on a survey of 100 hedge fund managers with $194 billion in combined assets under management. Half of the managers are based in North America, 30 percent are in Europe, and the remaining 20 percent are in the Asia Pacific region. Thirty-four percent of the participants are multistrategy funds and 26 percent focus on equity strategies.

The survey was conducted in the second quarter of 2022, the worst quarter for Bitcoin in over a decade. The most popular cryptocurrency plummeted 58 percent from April to June, the worst quarterly result since it lost 68 percent in the third quarter of 2011. Ethereum was also down more than 69 percent in the second quarter. 

One reason behind the enthusiasm that hedge fund managers have for digital assets is the trend toward more volatile pricing, according to Daniel Leveau, vice president of investor solutions at SigTech. Hedge funds can deploy a variety of derivatives in crypto trading, just as they do in the traditional stock and bond markets, where they significantly outperformed the benchmarks amid heightened volatility in the first half of 2022. 

In addition, hedge funds also favor digital assets for “the underdevelopment of their underlying market mechanisms, such as the centralized and decentralized exchange models,” according to the SigTech report. Added Leveau, “It’s still kind of an immature market structure for many of the digital assets, meaning there are inefficiencies [for hedge funds to] explore.” Compared to stocks in the S&P 500 index, mispricings are much easier to find in the crypto space, he said.

About a third of all hedge funds have already been investing in digital assets this year, up from 20 percent in 2021, according to a June report by PwC and the Alternative Investment Management Association. The number of hedge funds that invest exclusively in crypto — the so-called “crypto hedge funds” — has surged by roughly 50 percent over the past three years. Research shows that such hedge funds tend to perform on par with Bitcoin but with less downside risk, as Institutional Investor previously reported.

The fact that hedge funds have less restrictive investment guidelines has also fueled their interest in digital assets. According to Leveau, hedge fund managers can invest in a much wider universe without worrying about how much they have deviated from the benchmark, a concern usually reserved for traditional managers. “At the end of the day, that’s why hedge funds succeed,” said Leveau. “[They’re] not too constrained in terms of what investment guidelines [they need] to follow.”

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