Crypto hedge fund firm operators are left with a conundrum: Yields have risen, but capital raising has fallen.
A number of portfolio managers overseeing digital asset strategies have seen improved performance. This is especially true for those who focus on multi-strategy and high-yield approaches. This increase comes as we approach the anniversary of the fourth quarter of 2022.
In a research report focused on crypto hedge funds in the first half of 2023, 21e6 Capital of Switzerland found that direct funds underperformed bitcoin as the asset’s value surged in the first half of the year. Quantitative strategies and futures-oriented approaches also lagged the largest crypto player, which gained about 84% from January to June.
But there are signs of life when it comes to new launches.
According to 21e6 Capital, most funds were in the green, but in many cases the green was not good enough to attract capital.
“In our regular conversations with crypto funds, we sense that market sentiment among their LPs/investors is still weaker than one would expect after a positive start to the year,” the company writes in its August report. “Many funds have certainly underperformed the market and now have a harder time presenting a value proposition to their potential investors.”
In the fourth quarter of 2022, institutional investors with traditional financial ties had intensified their due diligence as the bull market continued to unfold before abruptly halting as FTX imploded.
According to industry participants, many of these Wall Street types slowed down the checks they were trying to write. And some have remained on the sidelines, at least in part due to the regulatory uncertainty that continues to cloud the sector’s prospects in the US.
Crypto native funds have mostly stayed the course — even if some players have invested more heavily in cash than they normally would. Meanwhile, digital asset markets declined in July, giving back some of their gains from the first half of the year.
ProChain Capital is a multi-strategy crypto fund investing in spot cryptocurrencies, digital asset-related equity and debt, and venture investments. According to an information brochure shared with existing and potential investors, the fund was up 42.21% by the end of July.
ProChain, led by its President David Tawil, fell 3.2% in July as the fund looks to recover from a 65.15% plunge in 2022, marking its first negative full-year result.
In an accompanying note to investors, Tawil wrote that the latest Ripple decision, rendered in a federal district court, is the “biggest crypto-related development in recent weeks.”
“The SEC’s stance that all crypto assets except Bitcoin are securities has definitely been undermined,” Tawil said, continuing to cite a number of unanswered questions in the case and unanswered questions in the US regulatory landscape more generally.
Hedge funds become buyers
Hedge fund managers have staked out broader investment mandates to capitalize on a series of ongoing dislocations in crypto markets. Last year marked the rise of specialist institutional funds, strategies that rely heavily on their investment team’s ability to generate alpha from a particular sector. Yield farming approaches came into vogue, and a number of crypto derivatives-only asset managers gained momentum.
Faced with smaller capital reserves and reduced wealth opportunities to deploy funds in a bear market, traders have expanded their business.
A key example of this is the increased buying and selling on Curve DAO (CRV) over the past few weeks. The result, according to several research reports, was a sudden increase in liquidity in the DeFi protocol.
Read more: Crypto hedge funds expect digital assets to rise by the end of the year
David Lawant, head of research at crypto-prime brokerage firm FalconX, wrote in a research report on Tuesday that the firm was seeing “heavy CRV activity from hedge funds, with buying and selling volumes nearly evenly distributed.”
The week before, FalconX researchers highlighted a trading trend, namely “hedge funds and retail aggregators.” [have been] better buyers, while venture funds and institutional money managers are better sellers.”
Crypto hedge fund managers’ continued purchases of digital assets and derivatives may reflect a belief that the market has bottomed — or at least been priced in. The buying trend marked a market bounce from July data, when hedge funds were considered better sellers and accounted for 53% of total flows, according to FalconX data.
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