Encouraging First Half for Crypto Hedge Fund Industry Set To Continue?

It feels like it’s been a bit of an odd first half of the year in the crypto hedge fund industry. At the end of last year, the news cycle was dominated by the collapse of FTX and the subsequent arrest of its founder, Sam Bankman-Fried. In May last year, the collapse of the Terra network and Three Arrows Capital got plenty of media coverage, and in both cases, contagion spread to the crypto hedge fund market. Indeed, last year was a very difficult year for the space, with the Barclay Cryptocurrency Traders index down -48.30%.

I say odd because it’s been comparatively quiet. The news cycle in the alternative investment space in the first quarter was dominated by the Silicon Valley Bank collapse, and while the digital assets space was impacted – Signature Bank’s crypto customer base being the news story – there wasn’t a massive contagion effect, at least on the broader crypto hedge fund market, in terms of returns. Indeed, the Barclay Cryptocurrency index was off only -0.43% in May, and ‘just’ -4.18% in June.

Crypto hedge funds will likely welcome the focus of the news media being elsewhere. Most hedge funds are notoriously quiet – they like to go about their business with a minimum of fuss – and the lack – or, at least, slowing – of incidents that have an adverse effect on the space so far this year means that most of them can, at the moment, do just that.

That’s not to say they don’t talk, of course. Publicly and privately, crypto hedge fund managers increasingly point to the maturation of the space both in terms of the investment strategy (better risk management incorporated into the strategy) and the middle and back-office operations of the fund (better technology and a better understanding of the nuances of the market by their service providers) as reasons why the massive volatility observed in the market in previous years should be able to be managed (at least to some extent). And even in the event of another major market event, there shouldn’t be a clear out of the space that we observed in 2018 when many funds couldn’t get back above their high water mark.

When an index is down almost half, that means that it needs to recover 100% to claw back those losses. Whether the crypto hedge funds that make up the Barclay Cryptocurrency Traders Index can do that remains to be seen. But they were up in 2019, and in 2020 and 2021, they were way up, at +172.91% and +140.05%, respectively, so those investors that have been in the space for a while will still be up.

The index is up +27.50% so far this year. Those in the space will be hoping for more of the same in the second half of 2023.