The State of Crypto Investment: Asset Management, Hedge Funds, and Family Offices

The State of Crypto Investment: Asset Management, Hedge Funds, and Family Offices

Analyzing recent reports from traditional finance investing in crypto

Cryptoassets have well established themselves as an investment class, and even after last year’s spectacular crashes and the ensuing bear market, they still attract traditional finance investors.

We have analyzed several recent reports on crypto asset managers, crypto-focused hedge funds, and family offices to get an idea about the current state of crypto investment.

Here are some key takeaways:

🔸    Since the beginning of 2023, the AUM (assets under management) of world’s biggest crypto asset managers has been steadily rising, surpassing $34 billion,

🔸    72% of asset managers’ AUM is allocated to BTC-based products,

🔸    74% of institutional investors are interested in crypto ETFs,

🔸    26% of family offices invest in crypto,

🔸    crypto hedge funds show impressive results, tapping into a rich source of alpha,

🔸    while 2022 was not kind to crypto hedge funds (remember a $10 billion 3AC’s collapse?), they still register a 435% growth since 2018.

Let’s take a closer look at this.

Crypto Asset Management

Crypto asset management is one of the easiest solutions for investors who wish to get crypto exposure without going into the trouble of buying and conserving crypto themselves.

CCData publishes regular reports tracking this sector, and the recent data shows that the fears of the bear market are slowly leaving place to moderate optimism and a renewed interest in crypto.

In April, the total AUM for crypto asset investment products rose by 7% to reach $33.6 billion, marking the fifth consecutive month of growth and a year-to-date increase of 70%.

With $23 billion of AUM, the US-based Grayscale is still the biggest crypto asset manager, covering 2/3 of the market.

Bitcoin-based products account for $24.2 billion, representing 72%, while ETH-based ones – 23.4%, gaining a bit of additional market share after the successful Shanghai upgrade.

Most crypto asset managers offer their funds only to accredited investors since crypto ETFs (exchange-traded funds) are still quite rare: spot crypto ETFs are still not authorized in the US (Grayscale is now suing the SEC for this), and the EU only allows crypto ETNs (exchange-traded note).

The interest in crypto ETFs, however, exists. A recent investor survey (325 global respondents, 40% manage over $1 billion in assets) by Brown Brothers Harriman, a private US investment bank, shows that a quarter of respondents expect to allocate more of their portfolios to ETFs with cryptocurrency-related exposure. This is a drop compared to 33% in 2022, but nothing surprising considering the scale of crypto FUD after the FTX scandal.

Most importantly, 74% of institutional investors are saying they are extremely/very interested in crypto ETFs.

Family offices

With their long-term vision and adaptive strategies aimed at preserving a family’s wealth, family offices’ behaviour can provide an interesting point of view on cryptoassets.

Goldman Sachs has recently published the results of its survey of 166 institutional family offices around the world, with a net worth of at least $500 million.

Crypto still comprises a tiny part of their portfolios – in fact, it is classified in the 4% of “Other investments”, together with art and listed real estate. However, this part is growing.

In comparison to the previous survey, more family offices have invested in crypto: 26% in 2023, up from 16% in 2021.

However, the events of 2022 may have shifted the sentiment of the hesitant part of the respondents to the negative side: 39% were “not interested” in crypto in 2021 vs 62% in 2023.

Hedge funds

Hedge funds usually represent the risk-on end of the investment spectrum. Limited partnerships of private investors aiming at earning above-average returns, hedge funds saw a boom in the late 1990s and early 2000s, surfing on the emerging internet technologies.

In a way, crypto hedge funds are experiencing the same period today, since crypto markets can offer a rich source of alpha (an excess return compared to the benchmark, for example, BTC/USD rate). This can be attributed to:

·         crypto markets are still fragmented, offering possibilities for arbitrage,

·         the ecosystem and the possibilities get increasingly complex,

·         trading is global and 24/7,

·         volatility is high,

·         vibrant derivatives market (65% of volumes in crypto are traded through derivative products, principally futures and perpetual swaps)

·         the infrastructure is constantly evolving…

Numeus Group, a crypto investment firm based in Zug, has published a report on liquid crypto hedge funds, and it shows impressive growth, and an even more impressive future outlook for the sector.

As traditional markets note the so-called “erosion of alpha”, the crypto market still has a wild-wild-west side to it, offering high returns to those who dare. This is particularly noticeable when compared to HFRX Global Hedge Fund Index, which is an established standard benchmark for hedge fund performance. While the latter has been generating close to 0% of alpha compared to S$P500 for most of the past 10 years, crypto hedge funds have shown exceptional results.

Overall, crypto-focused hedge funds are still a small part of global finance, managing some $54.6 billion.

According to Numeus, this figure is poised to grow, as the talent flows massively from traditional finance into crypto, a wider range of investment strategies is being developed and implemented, and the number of financial service providers, both crypto-native and traditional, is increasing.

Crypto fintechs such as Copper and Anchorage are now competing against traditional firms that include the likes of BNY Mellon and Fidelity. Other times, traditional and crypto firms are working together, a good example being Coinbase which has recently partnered with Blackrock to make crypto trading available through the latter’s widely used Aladdin platform.

Investing in crypto can be interesting for many reasons: from simply diversifying a portfolio to acting on a firm belief in blockchain technology, or hoping for above-average returns.

Whatever the reason, the amounts allocated to crypto are growing, as does the investment ecosystem.