The encryption hedging fund market is rapidly rising, with family offices and high-net-worth individuals becoming the main investors.

A recent survey report revealed the latest developments in cryptocurrency Hedging funds. The data shows that the assets under management (AUM) of these funds saw a significant rise in 2019, jumping from $1 billion at the end of 2018 to $2 billion.

In the performance of the entire year of 2019, fully delegated long funds performed the best, with an average return of 42%. It is worth noting that family offices and high-net-worth individuals have become the main sources of funding for these funds, accounting for 48% and 42% of investors, respectively.

Industry experts indicate that since the outbreak of the COVID-19 pandemic, people's interest in encryption has shown a general rise.

Emerging funds dominate, four major strategies run in parallel

The survey shows that there are currently about 150 active encryption hedging funds, of which nearly two-thirds (63%) were established in 2018 or 2019. The activity of fund establishment is highly correlated with the price trend of Bitcoin, and the surge in Bitcoin prices in 2018 became an important factor driving the establishment of cryptocurrency funds.

These funds mainly adopt four investment strategies:

1. Full power of attorney to go long: Focus on long-term investment, preferring early-stage projects and more liquid encryption currencies.
2. Full discretionary long/short: covering various strategies including relative value, event-driven, and technical analysis.
3. Quantitative Fund: Uses directional or market-neutral quantitative investment methods, focusing on highly liquid encryption currencies.
4. Multiple Strategies: Integrate the three strategies mentioned above and operate flexibly within a specific range.

Among them, quantitative funds are the most common, accounting for nearly half of the market share. The other three strategies each account for about 17%-19% of the market share.

Investor Structure Analysis

The survey results show that family offices and high-net-worth individuals are the main investors in cryptocurrency Hedging funds, accounting for as much as 90% of the total. In contrast, traditional venture capital funds and funds of funds have a smaller share in cryptocurrency investments, while pension funds, foundations, and endowment funds have even lower participation.

The median number of investors in these funds is 27.5, with an average of 58.5. The median average investment size is $300,000, while the average reaches $3.1 million. About two-thirds of the encryption hedging funds have an investment size of less than $500,000.

The distribution of asset management scale shows a clear Matthew effect, with a few large funds managing most of the assets, a pattern similar to the traditional hedge fund market. In 2019, the proportion of encryption hedge funds with an asset management scale exceeding 20 million USD increased from 19% in 2018 to 35%.

Performance and Investment Strategy

In 2019, the median performance increase of crypto hedge funds reached 74%, a significant improvement compared to -46% in 2018. Fully discretionary long funds performed the best, with a median performance of 40% in 2019. In contrast, quantitative funds were at 30%, fully discretionary long/short at 33%, and multi-strategy funds at 15%.

It is worth noting that Bitcoin rose by 92% in 2019, outperforming all encryption hedging funds. These funds played a role in reducing market volatility but failed to fully capture the market rise.

The development of the derivatives market has provided more investment tools for encryption hedging funds. Nearly half of the surveyed funds hold short positions, with 56% using derivatives. About one-third of the funds participate in futures and options trading.

In terms of leveraged trading, the proportion of funds using leverage rose to 56% in 2020, but only 19% were actively using it. In the future, with the improvement of market regulation and the enrichment of derivative tools, it is expected that more funds will venture into this field.

Overall, the encryption hedging fund market is rapidly developing, with investment strategies becoming increasingly diversified, but it is still primarily dominated by family offices and high-net-worth individuals. As the market matures, this field is expected to attract more attention from institutional investors.