As institutional investors steadily come around to cryptocurrency investing, hedge funds pursuing a crypto strategy face exciting opportunities alongside a growing need for partners to help them service the strategy, as discussed by Nadia Cobalovic, Co-Chief Operating Officer, Northern Trust Hedge Fund Services, Greg Clay, Senior Vice President – Relationship Management, Northern Trust Hedge Fund Services and Pete Connor, Senior Vice President – Middle Office Asset Servicing, Northern Trust Hedge Fund Services.
For years, cryptocurrency investing was seen as a fringe strategy reserved for bold individual investors happy to stomach wildly volatile markets. But as top cryptocurrencies like Bitcoin and Ethereum have gained relevance and proved their place in the investment industry, institutional investors have begun to recognize crypto’s long-term value and potential as a hedge against inflation.1
Their emerging interest is one reason cryptocurrency values are skyrocketing. To give context to their explosive growth, consider that a decade ago, Bitcoin’s market cap sat around $1.5 million at the beginning of 2011, while in 2021 it started the year off around $536 billion and, over the course of the first quarter, has at times crossed over into $1 trillion.2
With the market-moving influence of institutional investors entering the crypto world, hedge fund managers are naturally eyeing crypto strategies as a strong opportunity. Hedge funds setting out to pursue a crypto strategy will have to select administrative partners that have the knowledge, expertise and infrastructure to help them as the market rushes to scale up to this emerging strategy.
Growing opportunity for crypto hedge fund strategies
According to Fidelity, one-third of institutional investors now hold digital assets such as Bitcoin,3 and 47% see digital assets as having a place in their portfolios.4 Given this data, it’s clear that their acceptance of cryptocurrency has come a long way in the last decade. As they embrace the idea of investing in cryptocurrency, pure-play crypto hedge funds and hedge funds who offer crypto funds are sure to see greater demand – and potentially already have.
The total AuM of global crypto hedge funds roughly doubled from 2018 to 2019.5 Family offices are leading the way in this movement, making up 48% of crypto hedge fund investors, while high net worth individuals make up 42%, indicating untapped opportunity to bring other classes of institutional investors – such as pension plans and foundations and endowments – into the fold.
There are encouraging signs that institutional investors are ready to embrace crypto hedge fund strategies, but these sophisticated investors won’t sign on to invest with a manager who they feel isn’t addressing the elements of risk and unfamiliarity that accompany a crypto strategy.
Managers should consider a few key points when selecting service providers to support a crypto hedge fund strategy, such as:
- Previous experience in servicing crypto strategies
- Assistance with investor transparency
- Risk-averse custody options
This is a snippet of Northern Trust’s paper, 3 Key Considerations for Crypto Hedge Funds. To access the full article use this link to download it.
1. CoinDesk, “Crypto Long & Short: Bitcoin Is More Than a Hedge Against Inflation – It’s a Hedge Against ‘Crazy’”, December 20, 2020.
2. BitInfoCharts, “Bitcoin Market Capitalization historical chart.”
3. Fidelity, “Growing Number of Institutional Investors Believe That Digital Assets Should Be a Part of Their Investment Portfolios, According to New Research from Fidelity Digital Assets℠”, June 9 2020.
4. Fidelity, “New Research from Fidelity® Finds Institutional Investments in Digital Assets Are Likely to Increase over the Next Five Years”, May 2 2019.
5. PwC and Elwood, “2020 Crypto Hedge Fund Report”, May 2020.