Crypto Hedge Funds and How They Work

Overview

Hedge funds have been in the market for quite some time now. They are special investment vehicles that get funding from several investors to secure high returns on investments. Hedge funds attract wealthy investors who can easily bear the high management costs and other risks of a hedge fund. There are hedge funds in the cryptocurrency market as well, which provide ample opportunities for investors.

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What Are Crypto Hedge Funds?

Hedge funds are instruments that allow investors to take advantage of a large pool of diversified assets managed by professionals and an expert fund management team. The most common type of crypto hedge fund manages portfolios that exclusively focus on crypto. They can play the role of a venture capital fund and invest in pre-ICO crypto projects. In such a volatile market, crypto hedge funds can be quite risky, even though the rewards are equally enticing.

Another type of crypto fund usually adds a mix of crypto, other digital assets, and a bigger mix of different assets. These types of crypto hedge funds are less profitable but less risky than the above option.

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How Do Crypto Hedge Funds Work?

Crypto hedge funds work by gathering funds from investors to invest in a mix of cryptocurrency projects, such as derivatives projects, blockchain ventures, and other similar digital asset projects. They charge a management fee for managing the trader’s investment portfolio on their behalf and producing profits. The management fee usually ranges from 1 to 3% of the original invested amount.

Apart from management fees, investors are also required to pay performance fees to the experts. This is usually a percentage of the profits earned. Depending on the nature of the management, this fee can be quite high.

Traders require a substantially large minimum deposit to join a crypto hedge fund. For instance, traders have to pay a minimum of 2 percent in annual fees to join Grayscale Bitcoin Trust. Aside from this, they will also have to pay $50,000 or the crypto hedge fund might charge premiums if the trader wants to buy when the market is in an uptrend.

Regulatory Scenario for Crypto Hedge Funds

Crypto hedge funds have different regulations compared to traditional hedge funds. Governments around the world, including the United States government, have started to impose strict regulations on crypto hedge funds after the financially damaging events of last year. Since crypto hedge funds only have cryptocurrencies in their portfolios, they aren’t required by law to be registered with the Securities and Exchange Commission in the United States. 

Those hedge funds that employ a combination of assets such as stocks and cryptocurrencies aren’t required to be registered with the SEC either. They are only required to do so if their Assets Under Management cross $150 million. Due to the uncertainty behind them, many traders consider them to be an increasingly risky trading instrument.

Tokenisation in Crypto Hedge Funds

Over the years, various tradable cryptocurrency tokens have been released by certain cryptocurrency hedge funds. Examples include Blackmoon Crypto, or BMC, TaaS Fund, or TAAS, and Blockchain Capital, or BCAP. This has given rise to a new class of decentralised asset management platforms that deal with the open sourcing or crowdsourcing of fund management with associated cryptos.

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5 Biggest Crypto Hedge Funds

There are many different types of crypto hedge funds available, with each of them having its own pros and cons.

Digital Currency Group (DCG)

Digital Currency Group is the parent company of Grayscale Investments, Genesis Global Trading, and CoinDesk. DCG offers access to several crypto hedge funds, such as the Grayscale Smart Contract Platform Ex-Ethereum Fund, and the Grayscale Bitcoin Trust, or GBTC. It currently has over $40 billion in assets under management.

Morgan Creek Digital

Morgan Creek Digital is the crypto-focused subsidiary of traditional asset manager Morgan Creek Capital Management. It invests in blockchain companies and cryptocurrencies. With over $1 billion in assets under management, it has several funds under its belt, such as the Morgan Creek Bitwise Digital Asset Index Fund and the Morgan Creek Blockchain Opportunities Fund.

Polychain Capital

Founded in 2016, Polygon Capital is one of the largest crypto hedge funds in existence. Backed by prominent venture capital firms, it invests in both blockchain startups and cryptocurrencies. It has over $2 billion in assets under management.

Grayscale Investments

Grayscale Investments is a subsidiary of DCG and offers exposure to crypto via its funds and trusts. With over $30 billion in assets under management, it consists of the Grayscale Digital Large Cap Fund, or GDLC, the Grayscale Ethereum Trust or ETHE, and the Grayscale Bitcoin Trust, or GBTC.

Pantera Capital

Pantera is one of the first crypto hedge funds in the United States, founded in 2013. It invests in both blockchain startups and cryptocurrencies through its funds, such as the Pantera Digital Asset Fund, the Pantera Venture Fund, and the Pantera Bitcoin Fund. The total assets under management of Pantera Capital are more than $4 billion.

Conclusion

Crypto hedge funds have emerged as a specialised investment vehicle through which normal traders and investors can use the skills of industry experts. While they are a bit expensive, which makes them more suited for high-value investors, the returns are also handsome.

Frequently Asked Questions

Are Crypto Hedge Funds Safe?

Crypto hedge funds aren’t entirely safe due to their high fees, risks, and volatility. They face multiple challenges, such as regulatory uncertainty, cyber security risks, a lack of infrastructure, and market volatility.

What Was the First Crypto Hedge Fund Ever Launched?

The first crypto hedge fund to be launched was Pantera Capital in 2013. It was founded by Dan Morehead, a former Goldman Sachs trader and hedge fund manager. The hedge fund has more than $4 billion in assets under management.

Which Crypto Hedge Fund Has the Highest Value of Assets Under Management?

The crypto hedge fund with the largest amount of assets under management as of 2023 is Field Street Capital Management, which manages $297.96 billion in AUM. Citadel Investment Group comes in second, managing $253.35 billion in AUM.