Hedge funds distancing themselves from crypto

Global hedge funds have become increasingly cautious about crypto following recent turmoil in the industry, leading to a significant exit from the sector, according to a survey released on Tuesday.

The joint report by PWC and the Alternative Investment Management Association (AIMA) highlighted a drop in the proportion of traditional hedge funds investing in crypto-assets, falling from 37% in 2022 to 29% this year.

Approximately 25% of current investors in the sector expressed concerns over the growing uncertainty surrounding U.S. regulation, which may prompt them to reconsider their involvement with crypto-assets entirely. The report, which surveyed 59 hedge funds overseeing a combined $280 billion in assets, noted that last year’s market events impacted the investment decisions of over 70% of these funds.

The crypto industry faced significant upheaval last year due to a series of bankruptcies among major crypto companies, including the prominent U.S. exchange FTX. As token prices plummeted and various firms halted customer withdrawals, investors incurred substantial losses. Although the price of bitcoin has since made a steady recovery this year, investors remain cautious as U.S. regulators intensify their efforts to address non-compliance within the industry.

Jack Inglis, CEO of AIMA, acknowledged the shortcomings in the fundamental operations of the digital assets space, including risk management and allegations of corporate misconduct. In the report, he stated, “The digital assets space has had to reckon with short-comings in its fundamental operations, including risk management, as well as allegations of corporate malfeasance.”

Traditional hedge funds that refrained from trading crypto cited several deterrents, including reputational risk, ambiguous regulatory and tax guidance, and unreliable data. More than half of the respondents who had yet to enter the crypto market indicated their intention to wait for further updates and regulations before considering investment.

Among the hedge funds that had invested in crypto, the majority focused on bitcoin or Ethereum. Various strategies were employed by these funds, with multi-strategy accounting for 41%, systematic for 29%, macro for 12%, and equity for 12%. Despite some funds expressing a desire to allocate more capital to crypto, the report highlighted that crypto-assets only represented 2% of their total assets under management.