More than 20% of hedge funds launched in 2018 specialize in cryptocurrencies. Digital assets attracted the interest of a huge number of investors and financial organizations from all over the world. In 2017, Bitcoin has grown more than 13 times, not to mention many altcoins. None of the markets has already demonstrated such profitability since the beginning of the 2000s. In 2018, the market situation has changed, but even the current drawdown does not prevent beginners from launching cryptocurrency hedge funds.
The graph below shows how the number of crypto funds soared over the past two years. Currently, 162 funds have already been launched in 2018. In the third quarter of the year, the pace of opening new organizations slowed down. Therefore, we are unlikely to reach the amount predicted by the Crypto Fund Research group, but most likely we will repeat the result of the past “explosive” year.
At the moment, more than 630 crypto funds are operating on the financial market, and more than 300 funds are hedge funds. 90 out of 162 organizations launched are very active.
Beginners are not deterred from starting either the current drawdown on the crypto market or the problems of their colleagues, which were launched in 2017 or in early 2018.
A bear market usually discourages new investors, however, in the case of crypto active assets, the opinion is firmly fixed that they will definitely grow, and the only question is when the bottom will be found where you can buy at the best prices. In part, this motivation can explain the ongoing expansion of crypto funds.
If you pay attention to geography, the launch of funds unconditionally leads North America – 77 out of 162 funds were launched this year, followed by Asia with 36 funds and Europe with 35 funds. Only 17 organizations are running in the rest of the world.
According to Autonomous Next, the assets managed by most funds in 2018 decreased by more than 60%. Thus, according to the August investment report of Pantera Capital’s Digital Asset Fund, from the beginning of the year to the end of the summer, the company recorded a loss of 72.7%.
This is one of those organizations that enjoys a well-deserved prestige in the market – and yet could not avoid a huge drawdown. Along with it, such prominent funds as Mike Novograz’s Galaxy Digital LP (more than $ 175 million), Multicoin Capital, Polychain Capital have already reported on losses. Some large players even made a decision to leave the market – for example, the Crowd Crypto Fund and Alpha Protocol said. Lex Sokolin, director of the fintech strategy at Autonomous Research, expressed confidence in July that 10% of the crypto funds would not survive the year 2018.
How to increase profitability?
In addition to the general market drawdown, a significant minus on the balance sheets of the funds is generated by frozen investments in ICO. They are recorded in Ethereum, which dipped in a year from $ 1300-1400 to $ 120. If at the beginning of the year, it was possible to earn enough on ICO due to the difference in price when entering at an early stage and listing tokens on stock exchanges, now this is a purely venture type of investment. At the moment, it does not provide intramonthly profit, and, like any classic venture, is designed for the medium and long term. The difference in funds raised on ICO at the beginning of the year and now speaks for itself. Investors are not yet ready to return to active work in this area.
Considering that a HODL strategy does not bring short-term profit, the funds turn to other tools. Rebalancing is in progress, which allows you to react flexibly to events in the market, get out of some assets in time, and re-start at the best price. Also, a small part of the balance is sometimes sent to margin trading.
Some get up in short positions, that is, they put them on a lower market. The latter would be the most logical in the current situation, but it is complicated by the unpredictability of the market in recent months. The latter does not respond to fundamental news, indicators do not always show an adequate picture. As a consequence, it is difficult to determine points for entering and exiting shorts, which somewhat reduces the effectiveness of such a strategy.
Partly on crypto funds put down last year’s merit. In 2017, the average profitability of organizations reached about 1000% per year; investors are accustomed to seeing crazy profits in reports. And this year the game has changed radically: the priority was no longer receiving super-profits, but the preservation of the capital that we managed to make on the growth of the market. Many investors are not psychologically prepared for this.
Also somewhat complicates the work of the situation with the regulation. It is extremely difficult to find a comfortable jurisdiction for registering a fund, while banks and payment systems are not eager to open accounts easily for organizations working with a crypt. To resolve this issue, as a rule, it takes a lot of time and additional documentation. Sometimes regulators literally survive a new foundation from their jurisdiction. For example, such a fate befell the first official crypto fund of South Korea – Zeniex. He was forced to close immediately after launch in early November. Soon the cryptocurrency exchange belonging to this organization was closed.