More than a third of traditional hedge funds now invest in digital assets, nearly double a year ago

Even with the tremendous volatility in the sector, there are many more traditional hedge funds investing in crypto and more specialist crypto funds being created as the digital asset class gains acceptance, according to PwC’s 4th Annual Global Crypto Hedge Fund Report 2022, produced together with the Alternative Investment Management Association (AIMA) and Elwood Asset Management (now part of CoinShares).

Of traditional hedge funds surveyed, 38% are currently investing in digital assets, compared to 21% a year ago.  Meanwhile, the number of specialist crypto hedge funds is estimated to now top 300 globally, with the pace of new funds being created accelerating in the past two years.

“Increasing appetite and demand from investors has spurred interest in crypto as an asset class, spanning retail to institutional. In addition to the numerous hedge funds investing in crypto, many larger “traditional” asset managers have been exploring the crypto space, working on pilots, and are now starting to launch product. This will help to accelerate the institutionalization of the crypto markets and, as they mature, regulation and infrastructure will continue to improve. Given recent market developments, we are hearing greater demand for transparency and trust from investors”, said Olwyn Alexander, Global Asset and Wealth Management Leader, PwC Ireland.

According to the report, most traditional hedge funds getting into digital assets are still just dipping their toes – 57% have less than 1% of total AuM in digital assets.  But it is notable that for 20% of these funds, digital assets represent between 5% and 50% of AuM.  Further, two-thirds of funds (67%) currently investing in digital assets intend to deploy more capital into the asset class by the end of 2022.

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Total assets under management (AuM) of crypto hedge funds surveyed was USD 4.1 billion in 2021, up 8% from the year prior.

Crypto hedge fund performance continues to be robust. Increased regulation and transparency is wanted

Most crypto hedge funds traded Bitcoin ‘BTC’ (86%) followed by Ethereum ‘ETH’ (81%), Solana ‘SOL’ (56%), Polkadot ‘DOT’ (53%), Terra ‘LUNA’ (49%) and Avalanche ‘AVAX’ (47%). And despite crypto’s volatility, the median crypto fund returned +63.4% in 2021, though that was significantly off the +127.55% median return of 2020.

Regulatory uncertainty is a key issue for hedge funds, whether or not they are currently invested in digital assets.  Lack of regulatory and tax regime clarity was cited as a top challenge by 89% of hedge fund managers who currently invest in digital assets and for managers not currently investing in crypto, regulatory uncertainty ranked as a main obstacle by 83%.

In the traditional hedge fund space, managers point to a number of market infrastructure areas in need of improvements for digital asset adoption, led by audit and accounting, identified by 94%, and also including risk management and compliance (93%), ability to use digital assets as collateral (93%) and fund administration (89%).

The data contained in the report, the 4th annual edition, comes from research conducted in Q1 2022 across a sample of 77 specialist crypto hedge fund managers.