Digital Asset Adoption Among HFs is Widespread Yet Complex — Evening Brief – 10.16.24
The use of digital assets in hedge fund strategies is becoming increasingly widespread and complex, according to a new survey published by the Alternative Investment Management Association (AIMA) and PwC.
Digital asset investments have increased because of improved regulatory clarity and the emergence of spot cryptocurrency ETFs in the U.S. and Asia, the survey noted. Based on a survey of over 100 managers, the research concluded that 47% of traditional hedge funds have exposure to digital assets, up from 20% in 2023 and 37% in 2022.
Most firms (67%) intend to maintain their current level of capital investment in digital assets, while the remaining firms intend to increase their investment by the end of 2024.
Hedge fund managers continue to exercise caution, however. Of those who are not currently invested in digital assets, 76% indicated that they are unlikely to enter the sector within the next three years, a significant increase from 54% in 2023.
Almost 40% of respondents cited the omission of digital assets from investment mandates as the reason for their reluctance to allocate additional capital to crypto. Additionally, regulatory ambiguity persists, despite the implementation of enhanced frameworks, such as those in the EU.
Only 43% of respondents reported that they are receiving inquiries from institutional investor clients. The largest investor category in digital asset-focused hedge funds is family offices and high-net-worth individuals, followed by funds of hedge funds.
Additionally, these allocators have an increasing selection of investment strategies to select from. The research indicates that hedge funds are increasingly relying on derivative trading in digital assets, with 58% of them now doing so, a significant increase from 38% last year.
After reaching a high of 69%, spot-trading decreased to 25%. This diminished dependence on spot trades is indicative of the increasing sophistication of hedge fund strategies, as per AIMA and PwC.
Market neutral and discretionary long-only strategies are the most frequently implemented among traditional hedge funds, with each strategy being used by 33% of respondents. Market-neutral strategies are frequently preferred due to their capacity to mitigate risk while simultaneously pursuing returns in the volatile digital asset market.
Despite the absence of volatility mitigating characteristics in market-neutral portfolios, discretionary long-only strategies have the potential to capitalize on the upside potential of innovative blockchain projects or tokens, according to the authors of the report.
Even though two-thirds of traditional hedge funds do not intend to incorporate bitcoin ETFs into their current digital strategies, hedge funds are employing them in a variety of methods, noted AIMA and PwC.
Only one-quarter of the digital asset hedge funds that were surveyed intend to integrate ETFs into their strategy. Nevertheless, the report stated that they perceive hedge funds as favoring ETFs due to their role in the broader digital asset landscape.