Join NexChange - the professional
network for the financial services
industry - and receive a free one-
year subscription to Forbes
An Intro to ... Cryptocurrency Hedge Funds
FinTech, Blockchain, Financial Services
By Zoe Shing, NexChange
Many will have heard of “cryptocurrency fund” or “hedge fund,” but “cryptocurrency hedge fund” is still a rather recent term. This article explains everything you need to know about these funds and the risks that come with them.
The term “Cryptocurrency fund” is frequently used interchangeably with “cryptocurrency hedge fund.” A fund that trades highly cryptographic digital assets that are designed to be used as a medium of exchange is known as a crypto fund. Although this will not be the focus of the article, it is important to note that there are also two other types of cryptocurrency funds, including cryptocurrency venture capital funds and cryptocurrency index funds.
As defined in an article from “Snowball:” Cryptocurrency “hedge funds enable people to invest in a large group of underlying currencies overseen by the expert guidance of a fund manager or a team of fund managers. Hedge funds are constantly analyzed, evaluated, and re-balanced as necessary, to help them not only out-perform the market in general but to try and outperform their own excellent track records.”
Within these cryptocurrency hedge funds, there are some “that invest exclusively in tokens,” while others are more traditional hedge funds that “include cryptocurrency investments as either just a small part of a significant portion, of their overall portfolios.” Although these latter hedge funds are much lower in risk, they are also considerably lower in returns, “given the extraordinary rise in the value of many tokens.”
The difference in risks and regulations?
The risks of investing in cryptocurrency are high, and the sudden 72% drop in bitcoin prices last year simply proves its volatility. Nevertheless, the Financial Times reported that despite the erratic activity of the bitcoin market, 150 cryptocurrency hedge funds managed to survive, although several funds have indeed failed. Collectively, these 150 crypto hedge funds “manage assets of $1 [billion]”, but “fewer than 10 crypto hedge funds manage assets of more than $50m” due to it being “inherently risky.”
An analysis of cryptocurrency hedge funds in a report by the Stanford Journal of Law shows that there is yet to be a clear and concise guideline that frames the regulations for cryptocurrencies. Cryptocurrencies are only governed by a “functional framework” that classifies cryptocurrencies “either as a security or commodity,” and established cryptocurrencies such as Bitcoin and Ether are classified as commodities rather than securities. Hence, cryptocurrency hedge funds are not regulated by the same securities regulations as traditional hedge funds, nor can they be either, as “doing so would disregard the unique operational and technological features of cryptocurrencies.” Overall, the implication is that “crypto funds will need—and have the opportunity—to develop a set of best practices tailored to cryptocurrency trading.”