Crypto Hedge funds had their day in the sun during the feverish Covid period in 2020 and 2021. The strong beta results generated a remarkable number of managers starting to market in 2021 and 2022. Our Crypto Index had two exceptional years in 20/21. Despite a rough recent period, we are continuing to see additional funds coming to the market.
In 2023, the index has bounced back, partly driven by a strong comeback for Tech. Lately, the indices have decoupled from the Nasdaq index, and May and June will likely have taken some oomph out of the results, on the back of increased regulatory scrutiny.
In hindsight, being directional throughout last year, was the wrong call for a market dominated by a significant drawdown. That said, even after exchange failures we continue to see many new strategies. This time around, we are seeing managers with more sophisticated approaches to markets, various arbitrage strategies, yield farming, and short-term trading.
Thus, Crypto Trading is not dead, but managers are much more sophisticated today than they used to be. Even the Long-Biased managers have, maybe by necessity, added hedging strategies to avoid rapid declines.
Crypto Traders – Numbers
Looking across the NilssonHedge Crypto Hedge Fund database, we are thirteen manager shy of tracking one thousand strategies. Currently, the number of managers tracked is 987 and most of the new managers are non-directional (although a majority of the existing strategies are still highly directional).
We believe that our database is one of the larger databases focused on Trading Strategies. We typically do not have a large amount of Venture Capitalist strategies in the database.
Pre-2022, most of the strategies that we tracked had a HODL approach, buy Bitcoin or any portfolio of cryptocurrencies and hold on for dear life. And a lot of them discontinued return reporting during 2022 as it is difficult to entice investors into strategies with significant drawdowns. Today, we are seeing managers deploying a range of market-neutral strategies, generally a more sophisticated approach.
New Index – Market-Neutral Crypto
To reflect this reality, we will launch a subset of our Crypto Index focused on more market-neutral strategies. We expect to have done the research and will launch the index at the end of the month. This will generally have much lower volatility and be significantly less correlated to Crypto Beta.
Market Neutral strategies will impose significant Due Diligence hurdles. Multiple exchanges and an additional set of instruments are two of the many hurdles that may make these strategies harder to allocate to. On top of that, the underlying strategy is now much more complex than simply holding tokens.
Clouds on the Horizon?
One of the indicators that we track is the number of Sophisticated “retail” strategies (some of them have 20+ in aum), and here we are yet to see an improvement in the sentiment. That probably means that the counterparty for any Crypto trader has switched from a sentiment-driven trader to a likely institutional, market-inefficiency trader.
Coinbase recently made a substantial report on how to think about Crypto (partly using our data to illustrate correlations). The report can be found here: https://www.coinbase.com/institutional/research-insights/research/market-intelligence/asset-allocators-guide-to-crypto-hedge-funds
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