FT : Crypto hedge funds live to fight another day
Class volatility in spotlight as $1bn sector auto-reports average losses of 46%
About 150 cryptocurrency hedge funds, which together manage assets of $1bn, survived the volatility in the bitcoin market that saw the price of the most popular digital coin plummet by 72 per cent.
Bitcoin’s price fall last year resulted in heavy losses for most crypto hedge fund managers, according to a report by PwC and Elwood, a digital asset manager owned by Alan Howard, the billionaire co-founder of the Brevan Howard hedge fund.
Several funds failed last year and many others are still fighting to survive. Most crypto hedge funds hold assets of less than $10m, which raises questions about the long-term sustainability of their business model.
Senior regulators have issued pointed warnings. Benoît Cœuré, one of the eurozone’s top central bankers, last year described bitcoin as “the evil spawn of the financial crisis”.
Mark Carney, governor of the Bank of England, said in March last year that cryptocurrencies were “inherently risky” and called for tighter regulation.
Fewer than 10 crypto hedge funds manage assets of more than $50m. Two of the largest players are San Francisco-based Pantera Capital and Polychain Capital, the latter backed by venture capitalists Andreessen Horowitz and Sequoia Capital.
The median crypto hedge fund delivered a 46 per cent loss in 2018, highlighting the extreme volatility and high risks of this nascent asset class. Quantitative crypto hedge funds, which can take short positions to bet on a fall in the value of bitcoin and other digital currencies, fared better with a median return of 8 per cent.
“All performance data were self-reported by each crypto hedge fund and this information has not been verified by their respective fund administrators,” said Henri Arslanian, PwC’s fintech and crypto leader for Asia.
Mr Arslanian said that accurately valuing a crypto hedge fund was “challenging”, particularly those that held illiquid tokens or invested in early stage projects through simple agreements for future tokens (Safts).
In addition, many established fund administrators do not provide net asset value estimates for cryptocurrencies.
“There are only a limited number of fund administrators servicing the crypto space but this looks set to change as the industry matures,” said Mr Arslanian.
Three-quarters of crypto hedge funds do not have independent directors on their boards, raising questions about corporate governance standards and possible conflicts of interest.
“Having the portfolio managers also control the board may work for ‘friends and family’-type funds but it is unlikely that an institutional investor will commit capital to a crypto fund which does not have proper governance,” said Mr Arslanian.
Investors and cryptocurrency enthusiasts gathered in New York this weekend for Blockchain Week NYC, a week of events to explore the application of digital record-keeping technology to financial markets and other industries.
The price of bitcoin has recovered this year, rising 71 per cent since January 1 to $6,300, according to Bitstamp, a cryptocurrency exchange. Even after the rebound, bitcoin remains 68 per cent below its record price of $19,666 seen in December 2017.
Regulators worldwide are stepping up their scrutiny of cryptocurrencies and blockchain as more established financial players adopt the technology.
The Securities and Exchange Commission, the US regulator, will host a public forum on May 31 to discuss distributed ledger technology and digital assets.
Bin Ren, the chief executive of Elwood, said the crypto hedge fund sector was “just one part” of a much broader ecosystem of digital assets to attract interest from institutional investors.
“Broader interest from investors and regulators is undoubtedly a positive step towards digital assets being recognised as an asset class with true viability,” he said.