For accredited investors looking to invest in digital currencies who may be less interested in taking direct positions in crypto assets (whether Bitcoin, Ethereum or beyond), there are two major avenues to consider: Crypto Exchange-traded funds (or ETFs), as well as crypto hedge funds.
With the recent SEC approval of futures-based Bitcoin ETFs (and one such fund reaching the $1 billion mark faster than any other ETF to-date), there is clear demand from investors for exposure to cryptocurrency assets via ETFs.
With respect to hedge funds, there is clear growth as well, with PwC’s most recent crypto hedge funds report revealing an overall increase in assets under management (or AUM) from $2 billion in 2019 to nearly $3.8 billion in 2020.
But, how do these two investment vehicles compare?
Let’s first establish a clear definition for both of these investment vehicles and then understand some of the unique characteristics for each.
What is a Crypto ETF?
With respect to traditional ETFs, a fund provider normally owns and tracks assets. Investors purchase shares that represent their ownership in the aggregated collection of assets. Crypto ETFs can function in the same (or similar) manner, as there are a small number of funds that resemble ETF structuring, however in the US the only approved crypto ETFs to-date are the aforementioned Bitcoin futures-based ETFs, which do not own and track Bitcoin but rather trade on the future price of BTC.
What is a Crypto Hedge Fund?
A crypto hedge fund works in much the same way as a traditional hedge fund.
They are managed by individuals or teams with crypto asset expertise, and can be anchored in a quantitative, discretionary or multi-strategy approach. Moreover, crypto hedge funds can manage portfolios consisting solely of crypto assets while others combine cryptocurrencies with other asset types. From leveraging arbitrage opportunities to taking fundamental long positions, from equity investing to event-driven trading, crypto hedge funds are flexible investment vehicles.
The very first fund was launched in 2013 by Pantera Capital, but more recently, in 2017 there was an acceleration of the number of crypto hedge funds created. More than 80% of crypto hedge funds launched between 2017 and 2020, according to PwC.
How Do They Compare?
While both options generally offer investors the opportunity to invest in crypto assets without the need for securing private keys and managing wallets, there are some other important aspects to consider.
The approval of BTC futures-based ETFs, albeit a push forward for the adoption of cryptocurrencies in general, have left many within the crypto community less than satisfied, due to these ETFs being futures-based, and not presenting investors with exposure to the spot price of Bitcoin.
But, why is this important?
For one, this type of ETF approach exposes investors to contango risk, which occurs when longer-dated futures contracts are trading at higher prices than shorter-dated contracts.
Investors in bitcoin futures have actually underperformed the spot price of BTC by 28% over the past year, according to Jodie Gunzberg, Managing Director of CoinDesk.
For investors looking to mitigate risks involved with crypto investments while getting as close to direct exposure as possible, a BTC futures-based ETF may not prove optimal.
However, the familiarity and overall growth of interest in traditional ETFs as an investment vehicle of choice may appeal to investors.
Crypto hedge funds, on the other hand, do provide investors with the opportunity to get direct exposure to crypto assets without the need for managing the investments themselves.
Crypto hedge funds on average returned 128% in 2020 (versus 30% in 2019), and while the best-performing strategy overall has proven to be fundamental / long, the holistic growth and success of crypto hedge funds have come from a diversity of strategies, including a Fund of Funds approach, which we offer here at BitBull Capital.
Moreover, it is perhaps the opportunity for exposure to early-stage, pre-ICO investments within the cryptocurrency space which is appealing to high net worth individuals, the largest group of investors into crypto hedge funds.
While a futures-based ETF (or even a physically-backed ETF for that matter) does provide a level of exposure to the crypto market by tracking the market, a hedge fund seeks to outperform the market, with one such feature to this end being the ability to freely buy and sell crypto assets, depending on market conditions, all while keeping long-term objectives in mind.
This is achieved via market-neutral strategies such as arbitrage, market-making, volatility-weighted positions and beyond.
However, crypto hedge funds do come with management and performance fees, and investors are wise to fully understand hedge fund fee structures before taking the plunge.
Security of assets is also an area of importance, and in contrast to crypto ETFs, investing with a hedge fund does ultimately involve the need for custody solutions.
For investors that are adamant about maintaining as little direct exposure as possible to crypto assets, the crypto hedge fund structure may fall short of their risk-tolerance.
BitBull’s Multi-strategy Blockchain and Crypto Fund is an open-ended, liquid crypto hedge fund that invests not only in crypto assets but also equity such as Coinbase. We have the unique advantage of starting the world’s first crypto fund of funds in 2017, through which we do diligence on the 600 crypto funds, invest in 10, and make it our job to know the best-performing active management strategies and deals.
The undeniably short historical price data of Bitcoin and the rest of the crypto market, as well as the prevalence of price volatility, can pose an ongoing challenge for many crypto investors. Multi-strategy crypto hedge funds allow for the kind of real-time, event-driven optimization and diversification that befits the nascent — yet rapidly accelerating — stage of the crypto space.
That being said, given the importance of identifying the best crypto hedge fund option for each investor’s goals and risk-tolerance, we recommend taking a look at this guide we’ve put together which provides a deep dive into how to select a crypto hedge fund.
Beyond this, should you have any further questions, schedule a call with us today, as we are ready to help you understand the most up-to-date opportunities available and whether a multi-strategy, fund of funds option aligns with your particular needs as an investor.