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Blockchain and finance in 2019
The Five Biggest Cryptocurrency Hedge Funds
Much interest has been shown over the past year in institutional participation, particularly in traditional institutions that have yet to delve into digital assets. Within the cryptocurrency sphere, there are institutions with big holdings of cryptocurrencies. Many of these are big investment funds that exclusively invest in digital assets, with assets under management (AUM) of millions.
Although cryptocurrencies have yet to attain the credentials of a viable asset class, some hedge fund managers have been making moves into this nascent industry to exploit market potential. Not only has interest in digital assets been steadily increasing and seeping into the mainstream, but the number of hedge funds focused on cryptocurrencies have also seen a steady increase. According to the most recent PWC Crypto Hedge Fund report, it is estimated that there are over 150 active crypto hedge funds, collectively managing more than US$1 billion of AUM. On average, the typical crypto hedge fund manages close to US$21.9 million, and the majority of fund management is based in the United States.
What is a Cryptocurrency Hedge Fund?
A cryptocurrency hedge fund is an actively managed investment fund that pools capital from investors (usually individual retail investors) and invests in cryptocurrencies, often with complex portfolio-construction strategies and sophisticated risk management techniques. This allows investors exposure to cryptocurrencies as an investment without requiring deep expertise on finance, cryptocurrencies, or an investment-related repertoire. Cryptocurrency hedge funds are managed by a team of experts that is headed by an experienced fund manager, and is often re-balanced depending on market conditions. The ultimate goal of a hedge fund is to employ complex investment strategies in the pursuit of attaining financial returns that outperforms the general market.
There is a stark difference between a cryptocurrency hedge fund and a cryptocurrency fund. There are various types of cryptocurrency fund:
Cryptocurrency Hedge Funds
Hedge funds employ risk-management (“hedging”) strategies to generate above-average market returns for investors, usually investing in publicly traded coins and tokens.
Cryptocurrency Venture Capital
Much like traditional venture capital, these funds invest directly into a cryptocurrency-related project or a blockchain-based enterprise. Venture funds will invest in the early (seed) stage, even before the coin is listed in any exchange.
Cryptocurrency Private Equity
This is similar to venture capital funds — the only difference being the entry stage of investment. Cryptocurrency private equity funds will invest in a cryptocurrency or blockchain project that is much more mature, compared to when a venture capital fund might do so. This is to ensure that the technology or applications promised by the project has been proven to work and is ready to scale, thereby reducing the risk exposure of the fund.
Although these are the three major categories of cryptocurrency funds, many funds employ a hybrid approach, by allocating funds to publicly traded cryptocurrencies as well as being a seed investors in other cryptocurrency projects.
Five Biggest Cryptocurrency Hedge Funds
1. Polychain Capital
This is possibly the largest cryptocurrency fund globally, managing more than $1 billion in assets. It was founded in 2016 by Olaf Carlson-Wee, a prominent cryptocurrency fund manager who was initially the third employee to join Coinbase. Not only does Polychain invest specifically in digital currencies, it also invests in early-stage start-ups focused on blockchain technology and cryptocurrencies. Polychain has established itself as one of the most prominent cryptocurrency funds around, given their ability to attract funds from such esteemed venture capital institutions in traditional finance as Union Square Ventures, Bain, Founders Fund and Sequoia Capital. Polychain focuses on disruptive projects with solid fundamentals in order to get ahead of the market.
2. Pantera Capital
Pantera was founded by Dan Morehead, a former Chief Financial Officer (CFO) and the head of Micro Trading at a renowned hedge fund called Tiger Management. One of the oldest digital asset investment firm, Pantera Capital has also established itself as a pioneer in the cryptocurrency fund space. Pantera was established in 2003 and was initially a traditional hedge fund geared towards investing in macro trends. Recognizing the growth and potential of digital assets, Pantera took the leap and shifted focus towards blockchain and cryptocurrency. Pantera has several high-profile institutional backers in the traditional space including Benchmark, Fortress Investment Group, and Ribbit Capital.
Not everyone can invest in Pantera, as there is a minimum investment of $100,000 to be eligible to do so. This usually results in investors who are high net worth individuals or institutions that are interested in dipping their toes into the cryptocurrency world.
3. Digital Currency Group
Digital Currency Group (DGC) is a well-established fund in the cryptocurrency space with over 130 investments in various projects and cryptocurrencies. It was founded by Barry Silbert in 2015, renowned for his involvement in various cryptocurrency start-ups such as Coinbase, Bitpay and Ripple. The reach of DCG is immense, spearheaded by its subsidiary, Grayscale, which has an exclusive mandate into investing in digital currencies. As of 2019, Greyscale officially announced that it has amassed an AUM of over $2.7 billion, a valuation far beyond any of its nearest competitors. In fact, Greyscale’s AUM tripled in the first half of 2019 owing to Bitcoin Trust gaining 300% in relation to the same time period in the previous year.
The bulk of its client base – approximately 84% – comes from institutional investors, which represents a positive indication of the increasing interest of institutional players that are increasingly stepping up their presence in the cryptocurrency industry. Grayscale is also credited as being the entity that has managed the first ever publicly traded bitcoin investment vehicle called the Bitcoin Investment Trust. Many in the cryptocurrency community are familiar with DGC after their acquisition of CoinDesk, the biggest global cryptocurrency and blockchain-related media publications company.
4. Blockchain Capital
Blockchain Capital was conceived in 2013 and represents one of the oldest investment funds in the cryptocurrency space. It was founded by three prominent individuals in the industry: Bart Stephens, Bradford Stephens and Brock Pierce, chairman of the Bitcoin Foundation. Blockchain Capital engineered the first tokenized investment fund in the world, as well as the industry’s first security token (BCAP, issued in April 2017). Blockchain Capital invests in publicly traded cryptocurrencies and has equity in early cryptocurrency and blockchain projects, financing more than 80 companies since its inception.
Andreessen Horowitz (AKA “a16z”) is a renowned Silicon Valley-based venture capital firm with over $10 billion under management across multiple funds, that invest in various asset classes from seed to growth stages. It has a dedicated cryptocurrency fund with $350 million of AUM, with over 27 publicly-disclosed investments into cryptocurrency and blockchain projects. A16z’s entrance into the cryptocurrency space was a huge deal in the industry, given that it marks one of the first times that an established investment institution has made an explicit move into investing specifically in digital assets. Rather than employing active trading strategies, a16z has a more fundamental long-term approach to its investments.
Things to Know Before Investing
While cryptocurrencies have been known to provide spectacular return on investment for investors, the converse is equally true. Cryptocurrency prices can rise and drop tremendously in a short time span, and it is therefore no surprise that many have viewed it as a speculative asset to invest in. For this reason also it is not wise to keep all one’s eggs in a single basket — diversification of one’s investment portfolio is vital to mitigate investment risks.
From a regulatory front, it is important to understand that most avenues for investing in cryptocurrencies are outside the scope of regulation. This is a huge issue for the cryptocurrency market which is regarded as having a bad reputation in this area. Before investing in a hedge fund or an equivalent fund, it is important to verify that it is regulated by the appropriate regulatory body. Hedge funds and its equivalents are required to conform to regulatory requirements, including holding the appropriate financial licenses, minimum reserves benchmarks and furnishing periodic reports to various stakeholders.
It is heartening to see institutional presence in this nascent cryptocurrency industry, which is strengthened by the fact that several prominent traditional institutions have began making inroads into the industry by creating a specialized fund or by investing into the cryptocurrency markets via one of the aforementioned cryptocurrency hedge funds. The appeal of an established cryptocurrency hedge fund is high now, and growing even more attractive as we go forward.