According to a new survey by the Alternative Investment Management Association (AIMA) and PwC, almost half of all hedge funds that focus on traditional asset classes are now invested in cryptocurrencies. Improved regulatory clarity and approval of spot ETFs contributed to this increase.
Of the more than 40 hedge funds in the survey that trade in traditional markets, 47% have exposure to cryptocurrencies. Last year, only 29% had exposure, according to Bloomberg. Of the hedge funds already invested, two-thirds plan to maintain their crypto exposure, while the rest intend to increase their investments by the end of 2024, according to the survey.
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Various crypto strategies implemented by hedge funds
Many hedge funds initially entered the market by trading spot cryptocurrencies. However, more sophisticated strategies are coming into play, the study confirms. Of the funds active in the crypto market, 58% traded derivatives in 2024, up from 38% in 2023. Spot market trading fell to 25% from a peak of 69% last year.
The growing number of hedge funds involved does not necessarily imply direct exposure. Popular strategies often involve a "delta-neutral" approach that aims to minimise or eliminate market volatility. Simple arbitrage trades still offer opportunities for double-digit returns in this young market.
A clear trend
The PwC association has been conducting these crypto surveys among hedge funds since 2019. Even in earlier editions, there was a strong correlation between fund exposure and the price of bitcoin, as CVJ.CH reported in 2021. The regulatory environment also plays a key role. At the time, 82% of hedge funds without a crypto strategy cited regulatory uncertainty as the main barrier to investment. Client reaction and reputational risk were also significant factors (77%). The entry of major financial institutions such as BlackRock and the authorisation of critical investment products has likely created a different environment today.
“The findings from this year’s report indicate a steady recovery in confidence over the past year. It’s really the regulatory clarity that we started to see globally. That clarity is definitely boosting confidence in the asset class.” - James Delaney, managing director of asset management regulation at AIMA
However, some hedge fund managers remain on the sidelines. According to the survey, 76% of funds without crypto investments are unlikely to change their minds in the next three years. The exclusion of digital assets from their investment mandates is cited as a key reason.
