Home Markets Hedge Funds Wary of Regulatory Uncertainty in the Crypto Market

Hedge Funds Wary of Regulatory Uncertainty in the Crypto Market

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Hedge Funds Wary of Regulatory Uncertainty in the Crypto Market

Even amid the volatility in the sector, the potential for accumulating large amounts of wealth means that a growing number of traditional hedge funds are braving the risks to invest in cryptocurrency and digital assets. About four in ten funds have already done so, while more than a quarter would “definitely” accelerate investments in the sector if certain regulatory changes were made.

A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio construction and risk management techniques in an effort to enhance performance, such as short selling, leverage and derivatives. . Hedge funds make money through a fee structure paid by fund investors based on assets under management (AUM). Funds generally receive a fixed fee plus a percentage of positive returns that exceed a benchmark or hurdle rate.

The sector is not unheard of for taking significant financial risks – and some experts say the hedge fund industry was, in part, to blame for the crisis, as it pushed risky investments like mortgage-backed securities that led to the financial meltdown of 2008. Even now, some believe that hedge funds, or subsets of hedge funds, can still generate systemic risk that imposes externalities on the financial system.

2022: Investments in digital assets + Plans to gain visibility

One trend that economists might worry about on this basis is the growing push of hedge funds into the crypto economy. A new study by PwC – in conjunction with the Alternative Investment Management Association (AIMA) and Elwood Asset Management (now part of CoinShares) – found that a growing number of niche crypto funds are being created, as the digital asset class gains in acceptance.

At the end of 2021, some 38% of traditional hedge funds surveyed told researchers that they currently invest in digital assets. This is nearly double the 21% observed the previous year. Meanwhile, the global number of hedge funds specializing in crypto is estimated at 300 now, with the pace of new fund creation accelerating over the past two years. Meanwhile, the total assets under management of surveyed crypto hedge funds rose 8% to $4.1 billion.

Speaking on the phenomenon, Olwyn Alexander, Global Head of Asset and Wealth Management at PwC, said: “Growing investor appetite and demand has spurred interest in crypto as an investment class. assets, ranging from retail to institutional. In addition to the many hedge funds investing in crypto, many large “traditional” asset managers have explored the crypto space, worked on pilots, and are now starting to launch products. This will help accelerate the institutionalization of crypto markets, and as they mature, regulation and infrastructure will continue to improve. Given recent market developments, we are hearing greater demand for transparency and confidence from investors. »

Main regulatory concern + If the main obstacles are removed

However, cryptocurrency’s “wild west” reputation may deter hedge funds from investing further. Right now, most traditional hedge funds getting into digital assets are still at their feet – 57% have less than 1% of total assets under management in digital assets. The infamous market volatility sees returns slow significantly – with the median crypto fund in 2021 returning +63.4%, in stark contrast to the median return of +127.55% in 2020 – and attitude among hedge funds seem to be that without more regulatory safeguards they would be reluctant to invest more.

Whether or not they are currently invested in digital assets, hedge funds said regulatory uncertainty in the market was a key issue for them. In particular, the lack of clarity in the regulations and tax regime was cited as a major challenge by 89% of hedge fund managers, who currently invest in digital assets. Meanwhile, 83% of managers not currently investing in crypto echoed this sentiment. A further 36% clarified that their main concern with cryptocurrency regulation was that it was so fragmented globally, and 20% added that they wanted clearer guidance when it came to the design and the application of the rules.

If these major hurdles are lifted, many hedge funds notably seem more bullish on crypto. Around 27% confirmed they would “definitely step up investing” with more asset certainty, while 29% suggested it would potentially see them get more involved.

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