Last year was an atypically tough one for crypto hedge fund managers — not to mention their limited partners.
Scores of trading teams that had been institutional investor darlings flipped months, or even years, of profits into the red in a matter of days or even hours. Redemptions reigned. And regulators in the US and elsewhere cracked down on industry buy- and sell-side practices they deemed improper at best, illegal at worst.
All of which added up to the worst 12 months for portfolio managers in recent memory, if not ever. Cryptoassets have booked steeper drawdowns in past years, and volumes have been further suppressed.
But Wall Street wasn’t watching then.
There’s been a more recent “emergence of hundreds of new funds” fueling a “migration of talent from traditional finance into digital assets,” according to a recent report from Forteus Research, the asset management arm of sector asset manager Numeus.
There’s no shortage of headwinds sector managers are up against this quarter and beyond, according to the report, including a lack of allocator awareness and proper prime brokerage solutions. FTX’s collapse has “undoubtedly undermined trust in crypto service providers,” it said.
Digital assets severely lacked Wall Street’s recognition, and dollars, during previous bear markets. That’s still a work in progress, but Forteus found that recognition is improving.
Even if due diligence specific to digital assets is still a work in progress for pensions and endowments.
What happens next is of keen interest to everyone from traditional financiers parsing macro trends to digital natives digging for dislocations in the pursuit of alpha buried or baked into blockchains since the industry’s seismic fourth quarter shift.
The report took recent technological advancements in crypto infrastructure as one indicator of the sector’s progress. And partnerships that link the industry and Wall Street may be one more.
The study cited Coinbase’s 2022 crypto trading partnership with a Blackrock platform open to institutional investors as a “good example” of “traditional and crypto firms … working together.”
Crypto portfolio managers have largely trounced their traditional counterparts in terms of absolute returns for at least 36 months, according to Forteus.
The firm, citing HFRI data, found that Wall Street strategies have “witnessed a progressive erosion of returns and alpha capture over the past two decades, generating close to 0% of alpha when compared to the S&P 500 for most of the past 10 years.”
Barriers to crypto adoption
A major obstacle to the widespread institutional adoption of crypto has been the lack of institutional grade infrastructure. However recent developments, including the growth of service providers and the emergence of more specialist firms, have supported greater adoption.
There are now more than 400 crypto trading options on the market, per the report.
“Trading opportunities in the crypto space are constantly evolving and the fragmented nature of how digital assets trade leads to a number of price dislocations,” it said.
Considering that inefficiencies are persisting, crypto traders can book “profit from spread opportunities with limited basis risk and leverage,” the report said.
It found that about 65% of all digital assets trading volumes are traded via derivatives these days, with a focus on futures and perpetual swaps.
That places arbitrage strategies, according to Forteus, in high demand — one of several investment approaches the firm cited as maintaining momentum on returns, as well as investor interest.
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Source: https://blockworks.co/news/crypto-hedge-fund-trends-2023