Hedge Funds Finding Crypto Markets Increasingly Tradable as New Asset Class

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In Brief
  • Some of the world’s largest hedge funds are increasing their investments in cryptocurrencies, as they find more profitable ways to trade the market.

  • One reason for the increasing interest is that many of these firms have found a way to trade cryptocurrencies as if they were just another asset class.

  • Crypto markets are also strewn with “inefficiencies,” which well-endowed investment firms are able to capitalize on with timely and accurate information.

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Some of the world’s largest hedge funds are increasing their investments in cryptocurrencies, as they find more profitable ways to trade the market.

Billionaires hedge fund veterans Alan Howard, of Brevan Howard Asset Management LLP, and Paul Tudor Jones, of Tudor Investment Corp., are just some who have expanded crypto trading at their firms. For instance, Brevan Howard launched a cryptocurrency hedge fund at the beginning of the year, which will focus on speculation and arbitrage. The hedge fund also created a new crypto division in September, currently with 12 portfolio managers overseeing $250 million. Meanwhile, $15 billion New York hedge fund Hudson Bay Capital and other large firms have reported growing profits from trading cryptocurrencies.

Hedge fund strategy

One reason for the increasing interest is that many of these firms have found a way to trade cryptocurrencies as if they were just another asset class. “More funds see crypto as a fifth asset class,” said Robert Bogucki, co-head of global trading at Galaxy Digital Holdings Ltd. “It’s big enough now.” For this reason, Bogucki and others have noted that traditional hedge fund trading techniques often seem well suited for trading crypto. This was found to be especially true for those related to price and volume trends. 

Another draw of the relatively new crypto markets is that they are strewn with “inefficiencies,” which well-endowed investment firms are able to capitalize on with timely and accurate information. The legacy experience of these firms also works in their favor when squaring off with individual and inexperienced traders who lack skill in dealing with fast-moving funds. 

Bogucki also remarked on the way hedge funds are trading cryptocurrencies differently from other assets. For one, most hedge funds are eschewing short selling cryptocurrencies. Their notorious volatility could easily lend itself to a devastating price hike, that could just as easily reverse but leave losses intact. Also, most funds have been buying tokens and trading futures, rather than playing options markets. While the latter has proven harder to trade, there is still growth being reported.

Still doubters and risks

Despite the increased interest from several in the sector, many hedge fund veterans remain skeptical about cryptocurrencies. Doubts include whether crypto can serve as currency, given their poor track record as a store of value and limited acceptance as a means of exchange. Their use for diversification has also diminished as crypto markets have started behaving similarly to traditional markets.

Trading crypto also has several unique obstacles, with crypto exchanges victim to hacks, and investments lost to shady industry players. Firms hoping to deal in crypto must also contend with regulatory requirements, which can run the gamut from nonexistent to prohibition. Ultimately based around technology, cryptocurrencies are advancing at such a similarly astonishing rate that many may find themselves unable to keep up.

“In many ways, trading crypto is analogous to other trading assets, but there are different kinds of risks,” says quant trader Agustin Lebron. “By the time you’re ready to hit the button and trade for real, the crypto world may have moved on.”

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.

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