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A Crypto Fund is a Fund that specializes in Crypto Investments.
A Crypto Fund possesses specific expertise that gives it a clear edge when it comes to fending off the volatility associated with Crypto assets such as Bitcoin and Ethereum. Crypto Funds distinguish themselves by their outstanding performance. The HFRI Fund weighted composite Index (a global Index of Funds with minimum assets under management of 500 million dollars) indicates that while traditional Hedge Funds provided returns of 11.6% to their customers this year, Crypto Funds produced returns of 192.91%.
Crypto Funds use a wide assortment of fundamental and quantitative strategies to mitigate the effect of volatility on their customer’s portfolios.
Fundamental Strategy: fundamental strategies are cherished by long-only funds, with a long investment and lock-up period. These funds tend to invest in projects at a very early stage. They buy and hold cryptocurrencies with deep liquidity.
Discretionary strategy: a discretionary strategy is based on the experience and knowledge of the fund manager. A Discretionary strategy is an amalgam of various sub strategies, such as going long/short, news-based trading, technical analysis and more. A discretionary fund may also invest in ICO’s and Pre-ICO’s.
Quantitative Strategy: Approximately half of the Crypto funds in existence are quantitative funds. These funds reported on average 58% ROI, which is the highest ROI for all the strategies adopted by Crypto Funds. Directional or market neutral investments are preferred here. Some of the methods that are used by Crypto Funds that adopt quantitative strategies are: arbitrage market-making and low-latency trading. Only the most liquid cryptocurrencies are traded – this gives Quantitative funds the ability to get in and out of positions easily. Trading is done either manually or using advanced algorithmic trading tools.
Discretionary Long-Only: These funds are long-only and aim for a longer time horizon than other funds.
In addition to these strategies, a growing number of Crypto Funds are actively engaged in Decentralized Finance (DeFi) but more specifically in Staking (running a POS node), Lending and Borrowing. The percentage of Crypto Funds currently engaged in Staking is 42%; 38% of Funds are engaged in Lending and 27% of them in borrowing.
According to Crypto Fund Research, there are currently more than 800 Crypto-focused funds worldwide. Today, the top 5 Crypto Funds are: 1. Polychain Capital, 2. Galaxy Digital, 3. BlockTower Capital, 4. Pantera Capital, 5. MHC Fund.
- Polychain Capital, a US based Crypto Fund founded by Olaf Carlson-Wee (a former Coinbase employee), is focused on Protocols and companies that contribute to further the adoption of cryptocurrencies.
- Galaxy Digital, based in NYC, is a multi-strategy Fund founded by Michael Novogratz, a very well known face in the digital assets industry. Galaxy Digital has a stellar reputation and is one of the most trusted Funds in the industry. Galaxy Digital has seen inflows of over 700 million dollars.
- BlockTower Capital, with offices in New York, was founded in 2017 by Ari Paul. This Fund has seen inflows of 140 million dollars. It is known to organize the BlockTower Investment Analyst competition, a competition designed to attract top talent across the United States.
- Pantera Capital: At the moment, Pantera Capital is managing over 700 million dollars in assets spread across five cryptocurrencies. This fund is best suited for high net worth investors as it is a requirement to have at least 100 000 dollars to invest. Pantera Capital was established in 2013.
- MHC Digital Finance Pty Limited is co-owned by Mark Carnegie, a renowned investor and Venture Capitalist, and Sergei Sergienko, the CEO of Chrono.Tech, an Australian firm with global ambitions which is disrupting the world of Human Resources in a big way. The MHC Fund invests in digital assets such as Bitcoin and Ethereum, and is known to take smart, calculated bets in early-stage blockchain companies. The MHC Fund distinguishes itself with its multi-asset investment strategy, which protects investors from downside volatility by up to 40%, while capturing upside movement.
PWC reports that approximately 80% of funds use third-party or exchange custodians, most of them regulated, to manage the assets of their customers. The reason this percentage is so high is that certain jurisdictions absolutely forbid Crypto Funds to hold customer assets and have made custodians mandatory.
Crypto Funds typically charge their customers a management fee of 2%, and a performance fee of 20%. Management fees are charged to cover operational costs.
Bitcoin is extremely popular among Crypto Funds. Almost all Crypto Funds report holding or trading Bitcoin, however only 5% of crypto Funds are focused on BTC only. Ethereum is the most traded altcoin, with 67% of Crypto Funds trading or holding it.
A close look at the use of leverage suggests that Crypto Funds seem to be getting more aggressive with time. In 2019, around 36% of funds used leverage. In 2020, that figure increased to 56%.