Though the cryptocurrency market is still in its initial development stage, it has seen several people make millions in profit. This has attracted investors from around the globe who refuse to be discouraged by the risk associated with this trade. Institutions and investment funds, too, have gradually started embracing cryptocurrencies and applications built on blockchains, as this technology has seemingly edged itself a permanent place in the future of finance. Currently, there are about 150 hedge funds dealing in crypto, and in total, they manage north of $3.8 billion in assets.
Crypto hedge funds 101
A crypto hedge fund is an investment company that accumulates capital from several investors, whether it be individuals or institutions, and invests these funds in crypto. Usually, these funds will utilize complex investment strategies and risk management techniques, as their sole goal is to outperform the general market. They are usually chaired by an experienced fund manager, who must command investor confidence in their innate ability to milk the markets for profit.
To that end, there are different classifications of cryptocurrency funds that may confuse potential investors. The first is a crypto hedge fund like we’ve mentioned, which utilizes complex risk management techniques to generate above-average yields for their clients. They will usually do this by investing in publicly traded and well-established tokens and projects.
The second type is a crypto venture capital fund. These VC funds invest in up-and-coming blockchain projects, usually at their initial stages of development. They will often throw their financial might at the seed stage of such projects before they are even launched on major exchanges.
The final type of these funds is a crypto private equity fund. These closely resemble the VC funds, except they back projects that are further along in their development process. By ensuring that the project works as promised before investing in it, these private equity funds minimize their risk exposure.
Market leaders in the space
1. Polychain Capital
This is arguably the biggest crypto hedge fund in existence today. Established in 2016, it currently holds north of $1 billion in assets under management (AUM). It is chaired by Carlson-Wee, a famous fund manager and angel investor who was one of the first employees of Coinbase, a leading crypto exchange.
This fund invests in cryptocurrencies as well as start-ups based on blockchain technology. It has also managed to post impressive yields, which have seen it attract prominent venture capital firms as its investors. The fund focuses on disruptive projects in the crypto space that may surpass the general market.
2. Pantera Capital
Founded in 2003, this is one of the oldest funds of its kind in the crypto space. Originally, it began as a traditional hedge fund focusing on macro trends in mainstream financial instruments. However, it just as soon changed focus to cryptocurrencies and other digital assets when their potential for profit became clear. It is led by Dan Morehead, who was formerly the CFO at Tiger Management, a renowned hedge fund.
This fund has managed to attract a variety of high-profile institutional investors such as Ribbit Capital and Benchmark. However, it is not open to all as it has a minimum investment cap of $100,000. This sees it attract individual investors of high net worth and institutions as its clientele.
3. Digital Currency Group (DCG)
Founded in 2015, DCG has managed to rise to become one of the most successful funds in the crypto space. It manages more than 130 investments in various blockchain-related projects and tokens. Its founder, Barry Silbert, is famous for his contributions to several crypto start-ups such as Ripple and Coinbase.
Further, DCG’s subsidiary, Grayscale, made headlines in 2019 by hitting a record AUM of $2.7 billion. Most of their clientele comprises institutional investors. Grayscale also became the first fund to manage a publicly-traded BTC trust aptly named the Bitcoin Investment Trust. In 2019 alone, this trust posted yields of 300% year-on-year. DCG also acquired CoinDesk, which saw them garner global recognition.
4. Blockchain Capital
This fund was launched in 2013 by Bart Stephens, Bradford Stephens, and Brock Pierce. The latter currently sits as the CEO of the Bitcoin Foundation. Blockchain Cap launched the first-ever tokenized investment fund and the first-ever security token, BCAP. Their main focus is on publicly listed crypto projects as well as early projects in the space. In total, they have managed to support more than 80 of companies.
Andreessen Horowitz, popularly known by the pseudonym a16z, is a VC firm out of Silicon Valley that invests in crypto projects in various stages of development. This firm holds more than $10 billion in AUM. Their crypto fund contains $350 million of assets under management, and they are invested in more than 27 projects.
a16z’s move into the crypto sphere made headlines as it was the first time an established investment firm of their size was making the switch into digital assets. Notably, instead of the complex trading strategies employed by its peers for amassing huge short-term profits, this fund focuses instead on a long-term approach of reaping from these digital assets.
Risks of investing in crypto hedge funds
Digital assets are arguably the most volatile that we know of. In as much as they provide a huge potential for profit, they can just as easily culminate into huge losses in no time. For this reason, it is not wise to focus all your investments on crypto – diversification is key.
Additionally, cryptos lack the proper regulatory framework, and countries all over the world are grappling with this very issue. Be that as it may, before investing your funds in any of these hedge funds, you should ensure that they are regulated by the relevant body. They must have the proper licenses, meet the minimum reserves and periodically publish their returns as required by law.
Crypto hedge funds are investment firms that pool investor resources and invest in well-established blockchain-based projects and tokens. Their main goal is to outperform the market, which is why they tend to employ sophisticated strategies to aid in this venture. Before investing in these funds, you should ensure that they are properly regulated and licensed.