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Crypto Hedge Fund-It is the concept of currency-based hedge funds to the fore of investment folk’s attention which is conducted when the biggest crypto hedge fund manager, Three Arrows Capital (3AC), fell into the arms of liquidators. The firm, whose fund products had significant exposure to Bitcoin (BTC) and other cryptocurrencies, became one of the most prominent victims of the ongoing crypto market slump.
The fund’s failure has spotlighted the issues of risk and safety when using this type of investment vehicle. In this article on our blog money08.com, we’ll know the topic of cryptocurrency hedge funds and discuss the meaning, startings, risks, pros and cons, regulations involved in using these products, and more.
What do you mean by Crypto Hedge Funds?
A crypto hedge fund is a type of hedge fund that invests in cryptocurrencies and crypto-based products. Some of these funds may invest exclusively in crypto and digital assets, while others combine cryptocurrency investments with traditional asset types such as stocks, commodities, derivatives, and more.
In 2021, there were approximately 300 crypto hedge funds, with the total assets under management (AuM) averaging $56.8 million, more than double the AuM in the past year, which reached around $23.4 million.
Compared to traditional hedge funds, crypto hedge funds might be subject to somewhat less regulation, depending upon the composition of the overall investment portfolio, as detailed in the regulations section further in this article.
Regulation of Crypto Hedge Funds
Crypto Hedge Fund Regulations- US Regulation of hedge funds including digital asset funds is conducted at two levels:
- the issuer-level and
- the adviser level.
At the issuer level, the SEC and individual states regulate investment into the fund by US fund investors. At the adviser level, managers are regulated by either the SEC, CFTC, or neither based on whether the portfolio assets are classified as securities or commodities.
The Three Arrows Capital (3AC) collapse highlights cryptocurrency regulation, including issues related to the operations of crypto hedge funds. Tighter regulation of crypto had already been an ongoing development in the U.S. and other jurisdictions before the 3AC failure.
The firm’s high-profile downfall will likely expedite the introduction of additional regulatory measures, with crypto hedge funds being among the primary targets of this new government tough love.
At the moment, crypto hedge funds that invest exclusively in cryptocurrencies don’t have to register with the Securities and Exchange Commission (SEC). This is because the SEC has yet to officially recognize crypto as a security. This could change — and rather abruptly — given the SEC’s incessant stream of opinion pieces and announcements hinting at bringing crypto under the umbrella of security-related products.
However, if the crypto hedge fund has a diversified portfolio that includes stocks and other highly regulated assets in addition to crypto, then SEC registration of the fund might be required — unless the fund has less than $150 million under its management, in which case it would qualify for an exemption from SEC registration.
Additionally, if the fund plans to invest in complex derivative crypto products, such as leveraged assets or Bitcoin futures, it would have to register with the CFTC (Commodity Futures Trading Commission), the primary regulator of futures-based financial products in the U.S.
How Do Crypto Hedge Funds Work?
Hedge funds are investment vehicles that pool money from various investors with the goal of getting positive returns. Hedge funds are not regulated as heavily as mutual funds and have more leeway to pursue high-risk investments and strategies by using leverage, short-selling, and other speculative investment exposure.
Crypto hedge funds invest in a variety of cryptocurrencies, crypto-based derivative products, blockchain ventures, and other assets related to the crypto/blockchain industry to maximize investor returns.
For example, one of the largest crypto hedge funds, Pantera Capital, balances its investment in its Blockchain Fund between:
- promising new tokens with the potential to become rising stars like BIT
- established tokens, such as BTC, ETH, SOL, UNI, and more
- venture equity in leading industry projects, such as Balancer, Alchemy, Blockfolio, and others.
Crypto hedge funds typically charge a management fee of between 1% and 3% of your investment. In addition to the management fee, there is nearly always a performance fee payable as a share of the positive return generated from your investment. This fee may vary from 10% to as high as 40% of the return on investment.
For example, let’s say your initial investment in the fund is $10 million and the performance fee was set at 20%. After a year, your investment has grown to $15 million, a return of $5 million. Under this scenario, the fund manager will charge 20% of that $5 million (that is, $1 million) as the performance fee.
Participation in crypto hedge funds typically requires a substantial minimum investment. Pantera’s Blockchain Fund mentioned above, for instance, has a $1 million minimum investment requirement. This isn’t an unusual amount for a hedge fund. However, there are some funds for which the minimum investment could be as low as $100,000.
Strengths and weaknesses of Crypto Hedge Funds
Crypto hedge funds offer several advantages for investors. Naturally, along with the benefits of investing in these funds, there are some drawbacks and/or risks to watch out for.
Strengths
- Asset management by highly skilled professional fund managers. This is particularly important in the world of crypto, where inexperienced investors may fall victim to scams and rug pulls the industry is awash with.
- Higher potential returns, thanks to the high-risk/high-return strategies typically employed by these funds.
- Diversification away from over-reliance on traditional hedge funds.
Weaknesses
- Potentially high-performance fees. In some cases, the fees charged by the funds can be as high as half of the generated return.
- Limited access for individuals who aren’t high-net-worth.
- In general, the risky nature of both the crypto market and hedge fund investing.
How can I Start a Crypto Hedge fund?
Starting a crypto hedge fund in the U.S. requires following a number of steps to ensure that you don’t end up on the wrong side of the law. Fund managers who plan to invest only in crypto coins, and who won’t have more than $150 million under their management, don’t need to register with either the SEC or the CFTC.
Managing more than $150 million — or combining crypto investments with securities — triggers a requirement for registration with the SEC. Meanwhile, a CFTC registration is mandatory for investments in crypto futures, other derivatives, and leveraged products.
Additionally, the fund manager will need to check with the relevant state-level authorities concerning any local registration, approval, or permits.
List of top crypto hedge funds
Here is the list of top crypto hedge funds-
| Rank | Profile | Type | Region |
| 1. | Digital Currency Group | Crypto Fund Manager | North America |
| 2. | Alameda Research | Crypto Fund Manager | North America |
| 3. | Multicoin Capital | Crypto Fund Manager | North America |
| 4. | Polychain Capital | Crypto Fund Manager | North America |
| 5. | Amber Group | Crypto Fund Manager | Asia |
| 6. | Pantera Capital | Crypto Fund Manager | North America |
| 7. | Dragonfly Capital | Crypto Fund Manager | North America |
| 8. | Systematic Alpha | Crypto Fund Manager | North America |
| 9. | Electric Capital | Crypto Fund Manager | North America |
| 10. | Hunting Hill Global Capital, LLC | Crypto Fund Manager | North America |
| 11. | ParaFi Capital | Crypto Fund Manager | North America |
| 12. | Bitwise | Crypto Fund Manager | North America |
| 13. | CoinFund | Crypto Fund Manager | North America |
| 14. | Wave Financial Group | Crypto Fund Manager | North America |
| 15. | Isla Capital | Crypto Fund Manager | Europe |
| 16. | 10T Holdings | Crypto Fund Manager | North America |
| 17. | BlockTower Capital | Crypto Fund Manager | North America |
| 18. | Off The Chain Capital | Crypto Fund Manager | North America |
| 19. | Hazoor Partners | Crypto Fund Manager | North America |
| 20. | Cambrian Asset Management | Crypto Fund Manager | North America |
| 21. | Galois Capital | Crypto Fund Manager | North America |
| 22. | Shima Capital | Crypto Fund Manager | North America |
| 23. | Eaglebrook Advisors | Crypto Fund Manager | North America |
| 24. | Stratified Capital | Crypto Fund Manager | Asia |
| 25. | ODIN88 Asset Management | Crypto Fund Manager | North America |
List of top crypto hedge funds domiciles
Here is the list of top crypto hedge fund’s domiciles as per the 4th Annual Global Crypto Hedge Fund Report 2022
| Domiciles | % |
|---|---|
| Cayman Islands | 49% |
| British Virgin Islands (BVI) | 13% |
| Gibraltar | 12% |
| United States (US) | 10% |
| Canada | 03% |
| Germany, the United Kingdom, Luxembourg, Liechtenstein, Belgium, Singapore, Australia | 13% |
List of top crypto hedge funds manager location
Here is the list of top crypto hedge funds manager locations as per the 4th Annual Global Crypto Hedge Fund Report 2022
| Domiciles | % |
|---|---|
| United States (US) | 30% |
| United Kingdom (UK) | 10% |
| Hong Kong | 06% |
| Singapore | 06% |
| Switzerland | 06% |
| BVI, Canada, Germany, Gibraltar, Brazil, Israel, Luxembourg, Netherlands, Portugal, Malta, United Arab Emirates, Ukraine, Liechtenstein, Argentina, Mauritius, Spain, The Bahamas, Belgium, Slovenia, Australia, the Cayman Islands, South Korea | 42% |
Difference between crypto hedge funds and traditional hedge funds
| Crypto Hedge funds | Traditional Hedge funds |
|---|---|
| A crypto hedge fund is a type of hedge fund that invests in cryptocurrencies and crypto-based products. Some of these funds may invest exclusively in crypto and digital assets, while others combine cryptocurrency investments with traditional asset types — stocks, commodities, derivatives, and more. | In finance, the notion of traditional investments refers to putting money into well-known assets (such as bonds, cash, real estate, and equity shares) with the expectation of capital appreciation, dividends, and interest earnings. Traditional investments are to be contrasted with alternative investments. |
4th Annual Global Crypto Hedge Fund Report 2022
The 4th Annual Global Crypto Hedge Fund Report 2022 pdf is given below check out
Faqs on Crypto Hedge Funds
1. What do you mean by Hedge Fund?
Ans. A hedge fund is a financial vehicle in which money from multiple individual and institutional investors is pooled and invested in a variety of assets such as stocks, bonds, commodities, foreign currencies, cryptocurrencies, derivatives, and more with the goal of maximizing returns.
The pooled funds are managed by professional fund managers at the investment firm that offers the product.
Originally, hedge funds were focused on managing investments to hedge against market risks, hence the name. However, over the years, these funds have grown increasingly more aggressive, with high-risk/high-return strategies favored by fund managers. Today, hedge funds are characterized by a higher risk profile than the other popular types of funds — mutual funds and index funds.
2. What are the numbers of Crypto hedge funds?
According to a 2022 PwC report published in June 2022, more than a third of traditional hedge funds now invest in digital assets. The report added that crypto hedge funds are estimated to now number more than 300.
3. Should you invest in crypto hedge funds?
Crypto hedge funds might be a great way to invest because of their potential for astoundingly high returns. However, high returns inevitably come with high risks. In particular, the inherent risks involved in crypto hedge funds must always be kept in mind. Don’t forget that these funds combine two highly risky investment forms cryptocurrencies and hedge funds.
If you don’t mind this combustible mix, you may find crypto hedge fund investing to be a rewarding endeavor at least when your assets are overseen by a skilled fund manager.
4. Where are crypto hedge funds investing?
According to a PWC Global Crypto Hedge Fund Report, most crypto hedge funds traded BTC, ETH, SOL, DOT, LUNA, and AVAX in 2021. Note that hedge-fund managers and investment firms can make risky decisions leading to losses. You should always conduct your own research.
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