Crypto hedge funds – Polish and global trends
Most often, in economic terms, it is assumed that the hedge fund is an investment company. It manages a portfolio of securities available in public offerings, using leverage as well as derivatives. Hedge funds are among the riskiest investment funds.
Fund managers take long and short positions while investing in multiple financial instruments. A characteristic feature of a hedge fund is the independence of investment decisions from the general market situation. They generate profits regardless of whether there is a bull or bear market.
In other words, a hedge fund, thanks to its leverage and a variety of investment instruments, can make money even when the stock market declines. While other funds depreciate when declining.
The goal of hedge funds is to use unconventional methods of multiplying capital to reduce the risk of fluctuations in the value of the fund’s shares. Therefore, a hedge fund can earn income regardless of the market situation. The investor must also take into account that the fees charged by the hedge fund managers are calculated on the basis of the profit generated by the fund.
Hedge Fund: Principles of Operation
The investment portfolio is expected to bring substantial returns to wealthy individual investors or institutional investors. As they are usually limited partnerships, hedge funds are private ventures that are not subject to banking regulation. Hedging funds cannot solicit investors publicly and must require a minimum deposit of $ 1 million.
Funds often use leverage to increase profits. Limited redemption options allow you to take advantage of long-term investments. The possibility of obtaining higher profits justifies the “2 and 20” management fees (instead of 0.5% -1% for asset management used in typical mutual funds).
Hedge funds also generate substantial profits for investment banks that offer services such as stock trading, securities, and derivatives.
Funds often specialize in specific investment strategies, such as: “short position strategies”, “merger and acquisition arbitrage”, “macroeconomic strategies”.
Currently, hedging funds have transformed into limited partnerships. Shareholders – fund managers – share in the investor’s profits.
Crypto aspect
Cryptocurrencies presented itself as a new way to accumulate capital. Investment funds were created on the wave of their popularity. Prominent among them are crypto hedge funds.
As mentioned – a hedge fund is a high-risk investment fund that allows to multiply the amount of real investment through the mechanism of leverage, which automatically means that the profits earned can be many times higher, but the possible losses will also be much more severe.
Crypto hedge fund is a subtype of mentioned above investment fund, which focuses on cryptocurrencies and their derivatives. There are crypto specialized funds that only manage digital assets and traditional hedge funds which invest in variety of assets including cryptocurrencies.
Prominent examples of crypto hedge funds
Pantera capital – It’s the first crypto specialized hedge fund in US. It invests in various different enterprises, from blockchain sector, venture equity to liquid cryptocurrencies and early stage tokens.
Polychain Capital – An American fund based in San Francisco. Its main area of expertise is blockchain sector. As for its self-description, Polychain “Invests in protocols and companies in the blockchain space, advancing global adoption of cryptocurrencies”
Digital Currency Group – a parent company of Grayscale Investments, the largest digital currency asset manager. As described on its website, “we build and support bitcoin and blockchain companies by leveraging our insights, network and access to capital”.
Appia fund, which wagers on rising and falling crypto futures prices as part of its strategy, profited from the $40bn collapse of the cryptocurrency luna in May. The vehicle quickly placed short positions — bets on falling prices — to take advantage of the crypto token’s rapid decline. Luna crashed from more than $80 to close to zero in a matter of days. The fund made a good money from cryptocurrency market drop. It is now a common practice for many hedge funds to buy crypto while its price is low.
On the other hand, crypto market’s drop was fatal for Three Arrows Capital. Until recently it was one of the largest hedge funds investing in crypto managing as much as 10 billion USD of assets. With the market crash and Bitcoin’s drop into the 20,000 dollar range, 3AC failed to replenish deposits from its lenders – mainly BTC borrowed from BlockFi – which ultimately led to its insolvency. Fall of such big investment fund will probably accelerate the coming of new regulations into force. United States and European Union are trying to better protect investors interests on the shaky digital assets market.
Global market
Recent months have been quite hard for most cryptocurrencies and related businesses. In May alone, 500 billion USD left the crypto market. In June it was 400 billion. Overall the crypto market shrunk from 3 trillion USD to about 1 trillion.
The second quarter of 2022 proved to be hard for the cryptocurrency market. Price of Bitcoin and Ethereum declined rapidly during last few months. From the 4th of April the price of Bitcoin fell from 46 569 USD to 20 112 in 6th of July. In the same time Ethereum went from 3 520 USD to 1 138 USD.
Ethereum’s investment products’ aum fell by 46.7% during June. At that time Bitcoin declined by 33.6 %. The same trend applies to Ethereum’s trust products. Biggest those trusts, Grayscale in June had average daily volume of 4,54 billion, a decline of 24,6%.
Despite the volatile nature of cryptocurrencies however, crypto hedge funds continue to grow. The most recent report in that matter was the „4th Annual Global Crypto Hedge Fund Report 2022”. According to it, crypto specialist hedge funds have experienced growth by an average of 150% throughout the 2021.
The percentage of crypto hedge funds with assets under management over 20 million USD increased in 2021 to 59% from 46%, which is significant as 20m USD is the threshold for „critical mass” in the traditional hedge fund world.
Meanwhile interest in investing in crypto is on the rise among traditional funds. 38% of traditional hedge funds currently invest in digital assets, of which 67% intend to deploy more capital by the end of 2022. For 20% of those funds, digital assets compose between 5% and 50% of all their assets under management.
The median crypto hedge fund returned +63% in 2021, compared however +127,55% in 2020.
Although the current tendency for hedge funds is to grow and invest more, there are voices alarming that this shift may backfire resulting in bankruptcy similar to Three Arrows Capital.
Polish market:
The general trend from the world market has also reached Poland. Crypto hedge funds start to appear in Poland, taking into account all regulatory and administrative requirements. The incorporation of the crypto hedge fund is preceded by gathering the secured capital for a hedge fund startup. Afterwards there takes place preparation of incorporation documents, whereas hedge funds are often alternative investment funds which can determine their own investment policy and strategy. The most popular form of incorporation is in the form of limited partnerships.
Pursuant to Art. 3 of the Polish Act of 27 May 2004 on investment funds and management of alternative investment funds (hereinafter: the Act on Funds), the sole object of the investment fund’s activity is investing funds collected by proposing to purchase participation units or investment certificates in specific securities, instruments money market and other property rights. Moreover, the scope of allowable investments of both the open-end investment fund, the specialized open-end investment fund and the closed-end investment fund has been clearly specified by the legislator. Under Art. 93 of the Act on Funds, an open-end investment fund may invest its assets in securities, money market instruments, participation titles in investment funds and bank deposits. In turn, according to art. 145 of the Act, a closed-end investment fund may, in principle, invest its assets in securities, receivables, with the exception of receivables from natural persons, shares in limited liability companies, including companies based abroad, currencies, derivatives, including non-standardized instruments derivatives, property rights, the price of which depends directly or indirectly on specific types of things, specific types of energy, production or emission volume measures and limits, admitted to trading on commodity exchanges, and money market instruments, provided that they are transferable. It is assumed that it is controversial when a Polish investment fund directly invests in the assets of in crypto-assets, however, in principle it can do so indirectly.
