Mainstream Hedge Funds Pour Billions of Dollars Into Crypto
Veteran traders including Alan Howard and Paul Tudor Jones are said to be increasing their trading in cryptocurrencies
Some of the biggest names in the hedge-fund world are betting on crypto.
Veterans including Alan Howard, co-founder of Brevan Howard Asset Management LLP, and Paul Tudor Jones, the billionaire who runs Tudor Investment Corp., are expanding their crypto trading, according to people familiar with the situation.
Brevan Howard launched a cryptocurrency hedge fund in January that will begin accepting outside investors. The fund is making bets on the direction of bitcoin, ether and other cryptocurrency prices, while also searching for arbitrage between currencies. Brevan Howard has a new crypto division, BH Digital, created in September, which manages over $250 million and has 12 portfolio managers. Mr. Howard has also invested in crypto, blockchain and digital-token businesses.
Meanwhile, Mr. Jones has been buying cryptocurrencies to try to protect against rising inflation. And Hudson Bay Capital Management LP, a $15 billion New York hedge fund, has seen growing profits from trading cryptocurrencies, according to a person familiar with the situation, as are other large firms.
The embrace of crypto by more veteran hedge-fund traders—which are often wagering on the direction of a token’s price, much as they do with stocks—is the latest sign of Wall Street’s warming to digital currencies.
“More funds see crypto as a fifth asset class,” in addition to stocks, bonds, currencies and commodities, says Robert Bogucki, co-head of global trading at Galaxy Digital Holdings Ltd., an early crypto investor. “It’s big enough now.”
Galaxy, launched by Michael Novogratz, a former senior executive at Goldman Sachs Group Inc. and Fortress Investment Group, now manages about $3 billion.
One difference from stock trading: Most hedge funds are avoiding shorting cryptocurrencies, says Mr. Bogucki, worried that these currencies might shoot up in price, leading to quick and big losses. Most funds have focused on buying tokens and trading futures, rather than playing options markets, which can be harder to trade though option activity is growing.
Coinbase Global Inc. , the largest U.S. crypto exchange, said institutional investors as a whole traded $1.14 trillion of cryptocurrencies in 2021, up from $120 billion the year before, and more than twice the $535 billion for individual investors.
Soaring trading volume allows hedge funds to buy and sell without affecting prices, a level of liquidity necessary that allows them to place bigger bets.
Ken Griffin recently said his firm might begin making markets in crypto for clients, though its separate hedge-fund business hasn’t begun trading in crypto.
PHOTO: CHRISTOPHER DILTS/BLOOMBERG NEWS
The “crypto universe is now liquid and large enough to be tradable,” says Michael Botlo, who ran the quantitative-trading fund Quantbot and is now working on crypto initiatives. “Hedge funds are seeing their own investors demand that the firms get involved.”
Many hedge-fund veterans remain doubtful about cryptocurrencies, which have yet to prove themselves as true currencies of exchange. In addition, cryptocurrencies have done a poor job of storing value or acting as a means of diversification for investors as the crypto market has increasingly reacted to the same cues as traditional markets.
Paul Singer, who founded Elliott Management Corp., has been outspoken in his skepticism of cryptocurrencies. Ken Griffin, who founded Citadel Securities, has long been dubious of crypto, but he recently told Bloomberg TV that his firm might begin making markets in crypto for clients, though Citadel’s separate hedge-fund business hasn’t begun trading crypto.
Still, there are reasons more hedge funds and trading firms are rushing to cryptocurrencies. Unlike stocks, bonds and other traditional asset classes, the crypto market is relatively new with ample “inefficiencies,” or opportunities for big firms with access to timely and accurate information to profit, some traders say. The crypto market is also full of individual and inexperienced traders who often do poorly in squaring off with fast-moving funds. Wall Street firms haven’t established dominance, creating potential opportunities for new players.
Proprietary trading firms, including Chicago-based Jump Trading Group and New York-based Jane Street Capital LLC, which fill crypto trades for customers of Robinhood Markets Inc. and others, saw significant profits last year executing crypto trades, according to people familiar with the situation. The firms, which make markets in cryptocurrencies while also building technologies and tools for crypto traders, are seeing growing interest from hedge funds and other institutions.“A wider range of funds are getting in and trading more,” says Mina Nguyen, head of institutional strategy at Jane Street.
Galaxy’s Mr. Bogucki and others say traditional hedge-fund trading techniques often work in crypto, especially those focused on price and volume trends. So-called quantitative funds are developing algorithms to predict future crypto moves based on historical trading data and pattern recognition. Some hedge-fund traders point to the success of Sam Bankman-Fried, the young former Jane Street trader who started FTX, the fast-growing cryptocurrency exchange, as a sign of how their skills can be applied to these newer markets.
There are unique obstacles to crypto trading, however. Crypto exchanges can be hacked, and investment money can disappear. Regulatory barriers can be high, especially for firms registered with the Securities and Exchange Commission, such as finding qualified custodians and making sure clients can invest in crypto. The crypto world is also changing so quickly that large firms deliberating on a push into the market can find themselves left behind.
“In many ways, trading crypto is analogous to other trading assets, but there are different kinds of risks,” says Agustin Lebron, a quant trader who is building a crypto-trading firm called Raposa. “By the time you’re ready to hit the button and trade for real, the crypto world may have moved on.”
Squarepoint Capital, a hedge-fund firm that manages about $10 billion and is registered with the SEC, has been trading bitcoin futures on the Chicago Mercantile Exchange but has been reluctant to do much crypto trading.
“We’re more in the data acquisition mode and seeing if some of our modeling can apply to these markets,” says Maxime Fortin, a founder of the firm. “But there are significant regulatory hurdles.”