Crypto hedge funds have been forced to implement a number of creative strategies to survive 2018’s endless bear market. With approximately 5% of crypto hedge funds closing down since the beginning of the year, the hedge funds that remain are exploring new investment strategies.
The Block recently published an article exploring the strategies crypto hedge funds are using to survive the ongoing bear market.
It’s not just crypto prices that are hurting crypto hedge funds. Some hedge funds are being sued by investors for failing to deliver on investment promises. Others have been issued subpoenas as a result of these lawsuits.
Amidst this struggle, some hedge funds have been forced to shut down. Others, however, remain afloat while patiently taking positions and awaiting the next bear market.
As the crypto world exploded with growth in 2017, a number of hedge funds emerged to address demand. These hedge funds were supplying a need: people wanted to participate in the crypto space in a safe and easy way. They wanted a slice of the dramatic profits.
That all sounded good in 2017. Since January 2018, however, crypto prices have been on a downswing. Most cryptocurrencies are down 80% from their all-time highs in December 2017 or January 2018.
The Block cites a report by Crypto Fund Research stating that 35 cryptocurrency funds have shut down since the beginning of 2018. That research agency tracks a total of 633 funds. Stated another way, 5% of crypto hedge funds have shut down since the beginning of 2018.
As for the funds that haven’t shut down – what are they doing to fight back against the bear market?
Cutting Costs And Raising Capital
The Block interviewed several crypto hedge fund managers at Consensus Invest. One hedge fund manager emphasized the importance of budgeting in a bear market:
“Budgeting is a new thing in this market. We are allocating capital prudently and are thinking about return on investment. For instance, if we are going to do a trip to Asia, then we are going to make sure that trip will be four times as valuable as a trip to California.”
That hedge fund manager was surprisingly optimistic about the bear market, describing that it’s easier to build a business in a bear market because you have to be disciplined with money management.
In a bull market, it’s easier to toss money around while still earning a profit:
“It is hard to grow a strong business in a bull market because you aren’t forced to make tough decisions,” said Ari Paul, co-founder of crypto hedge fund BlockTower Capital. “Tough decisions lead to better allocations.”
Other firms are making similar decisions while also trying to increase the amount of money coming in. They’re making new pitch decks to attract new investors. They’re seeking to draw investors to the space with promises of a great buying opportunity.
Through a combination of cutting costs and raising new capital, some hedge funds have been able to survive the market.
Crypto Hedge Funds Are Embracing New Opportunities
Money management and new investment income can only go so far. At some point, hedge funds have to explore new opportunities. The days of easily and quickly flipping ICO tokens for 100% profits are likely over. As the crypto world becomes more institutionalized, it’s going to become increasingly competitive for hedge funds to keep up.
Here are some of the strategies today’s hedge fund managers are using to stay competitive in the crypto space, according to The Block:
Many funds have been able to successfully run long/short strategies over the course of 2018. Successful funds have generated profits from the upturns and downswings of the market. Tetras Capital and Neural Capital, for example, profited on an Ether short earlier this year. In July 2018, Forbes wrote an article describing how major crypto investors were “betting heavily against Ethereum”. Tetras Capital started shorting Ether in May 2018 when the price was between $572 to $659. By July, ETH was priced at $470. Today, it’s close to $110.
CoinFund originally coined the term “generalized mining” to refer to certain “mining 2.0” strategies that capture alpha through active participation in crypto markets. This can include something as straightforward as staking, where coins are staked to earn a return on investment. It can also include contributing to the network by providing validation services or provisioning resources to decentralized networks.
Downwards price action and high volatility has led some crypto hedge funds to adopt a unique strategy: they implement quantitative market-making strategies to produce market-neutral returns. These exchange arbitrage opportunities have been able to keep certain hedge funds afloat amidst the bear market. However, arbitrage opportunities have reportedly decreased due to a rise in market-making activity from other hedge funds.
Venture Capital And Distressed Debt
Some crypto hedge funds are looking to get involved in the venture space. By capitalizing on the right types of distressed investments, hedge funds can generate enormous returns. After a market crashes, venture capital firms have access to some of the best opportunities in the space. Even the best and most promising startups might be floundering. With the right injection of capital, crypto hedge funds can generate an enormous return on investment. Crypto hedge funds are starting to embrace those opportunities.
What’s Next For Crypto Hedge Funds?
Many suggest January 2019 could be the turning point for the crypto industry. A number of events in January 2019 could signal the start of a bull market. Or, it could prolong the bear market even further.
Institutional and retail crypto investing platform Bakkt, for example, is expected to launch in late January 2019. This could pave the way for a bitcoin ETF and other bitcoin investment products. Of course, it could have the opposite effect on markets if the SEC denies the bitcoin ETF.
While the market continues to go through a prolonged bear phase, crypto hedge funds are riding the waves. The best crypto hedge funds are staying afloat, while many funds are sinking to the bottom.