Cryptocurrency hedge funds vs ETFs – ETF Stream

Cryptocurrencies have reached politics far quicker than other financial instruments given their use in criminal activities and the potential to destabilise central banks and fiat currencies. In contrast, ETFs have accumulated $10trn assets with minimal interest from politicians.

However, the interest from Washington likely peaked in November 2021 when a group of cryptocurrency investors raised $40m to buy a copy of the US Constitution. They were outbid by Ken Griffin, the founder of Citadel, a large multi-strategy hedge fund and market maker.

The interest from hedge funds in cryptocurrencies has also been rising given that alpha on traditional markets has been almost completely arbitraged away. Essentially all classic hedge fund strategies are being deployed in the space, with quantitative ones leading (37% of hedge funds), followed by discretionary long-short (28%), discretionary long-only (20%), and multi-strategy (11%), according to PwC’s third annual global crypto hedge fund report 2021 of PWC.

Unfortunately this likely will lead to an erosion of alpha, like in all markets. In this research note, we will evaluate the performance and characteristics of cryptocurrency hedge funds.

Performance of cryptocurrency hedge funds

As of the end of 2020, cryptocurrency hedge funds were estimated to manage close to $4bn, according to the PWC survey, which seems low compared to $3trn managed by the broad hedge fund industry and $2trn of the combined market capitalisation of cryptocurrencies.

We use the Eurekahedge Cryptocurrency Hedge Fund index in this analysis. The index currently has 17 cryptocurrency hedge funds reporting returns, which are equally weighted. The performance of the index has been exceptional with a return of 11,967% since inception in 2014, compared to a mere 135% for an index comprised of the largest 50 hedge funds, and 267% for the S&P 500.

Source: https://www.etfstream.com/features/cryptocurrency-hedge-funds-vs-etfs/