By Austin Hubbell
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This is a brief post summarizing the recent report "2019 Crypto Hedge Fund Report" published by PWC Hong Kong and Elwood Asset Management Services.
- Majority of crypto hedge funds are still small, over 60% have less than $10M AUM
- Despite the relatively small AUM, median team size is still quite large (6 person median team size compared to $4.3M median AUM)
- Crypto hedge funds are geographically distributed in the same regions used by funds in other asset classes (64% of management companies located in the US and 55% of the hedge funds are domiciled in the Cayman Islands)
- Only 37% of funds surveyed are classified as "Quant" funds, although the median returns of this category of funds is significantly higher (see below)
- Use of third-party research is extremely low, with only 7% of funds surveyed claiming to use third-party research as part of their investment process
A few key points highlighting the state of the crypto hedge fund industry:
NOTE: This report uses the 2018 calendar year as the measurement period for all fund performance metrics, which was an extreme bear market by almost any definition. It's also worth noting that their definition of a "Fundamental" strategy is restricted to long-only positions.
This report shows that 74% of the funds surveyed are permitted to take short positions (based on their private placement memorandum, PPM, documents). However it's likely that a much smaller percentage are actually able to properly execute a large short, as mentioned in the final pages of the report:
While both Fundamental and Discretionary funds suffered huge losses overall, the funds that embraced Quantitative strategies were able to generate significant profits relative to both the price of bitcoin as well as their peers in the other fund categories. Also, note that the return curve for Quant funds is much smoother which may indicate more allocations to market-neutral strategies.
Custody is one of the most popular topics of discussion in the digital asset management industry (regardless of category of fund), and for good reasons. The nature of the public key/private key "ownership" mechanism of most digital assets makes them a prime target for hackers and bad actors. Once an individual or group has gained control of the private key associated with your funds, they are able to transfer/sell/restrict those assets in ways that are irreversible. For this reason, proper custody of assets under management has been one of the biggest concerns of managers, regulators and investors.
According to this report, only 52% of funds surveyed actually use an external custodian to hold their assets. At first glance, this may seem like an astonishingly low number. However, there are many trading strategies that require funds to be predominantly held on exchanges, most of which are considered to be quantitative strategies (e.g. market making, arbitrage, HFT). Adjusting for the proportion of Quantitative Funds surveyed in the report (37%) leaves a mere 11% of Discretionary and Fundamental Funds that do not use an external custodian.
Another important factor that institutional investors look for when allocating to external funds is the governance structure of the fund, and whether or not there are any independent directors on the board.
Reminder: This is not investment advice, always do your own research.
Although this report focused on the 2018 calendar year for calculation of performance metrics, there were a few key points that eluded to the advantages that Quantitative Hedge Funds or "Quant" Funds have over Discretionary and Fundamental Funds:
- Quant funds are typically more liquid overall, as a lot of their strategies require jumping in and out of positions frequently (these funds almost exclusively invest in liquid assets)
- Shorter lock-up periods, more frequent opportunities for redemptions (this report states a typical lock-up period of 6 months and monthly redemption frequency)
- Lower management fees, creating stronger incentives for managers to perform well against benchmarks / high watermark (keep in mind, this report shows that performance fees were on average ~4% higher for Quant funds)
- Automation & algorithmic trading: Quant funds typically employ automated trading strategies, which often do not require human intervention to place trades. This can be a huge advantage when operating in markets that are open 24/7
Consilium Crypto is a big data company that provides quantitative and qualitative insights to market participants in the digital asset space, including funds, family offices and exchanges.
Consilium analyzes 17,000 trading pairs, over 1000 assets, across 50+ exchanges, and tracks trading activity to the millisecond. Our system monitors raw transaction data, as well as complete price and liquidity information from order books around the globe. These data pipelines power our core products, designed to help funds find alpha and place large orders efficiently in times of thin liquidity.
For more information, send an email to info@consiliumcrypto.ai