In a further sign of the 2019 cryptocurrencies comeback, and the sector’s gradual inching closer towards mainstream financial markets, high profile hedge fund boss and trader Alan Howard is reportedly planning a $1 billion crypto assets investment vehicle. His company, Elwood Asset Management, set up to manage Mr Howard’s personal crypto asset investments, is, says the Financial Times, working on a digital platform that will design crypto funds for institutional investors. The platform would work with a handpicked group of hedge funds in the crypto asset space, selected for their ‘higher quality operations’.
Many of the hedge funds involved in the crypto sector are considered by extremely high risk as they are heavily exposed to the boom and bust cycles that cryptocurrencies are famous for. There are, however, others, that take a more conservative investment approach. While they are still ultimately bets on the crypto market and would sustain significant losses if market itself did, they also take an approach common to hedge funds in less volatile sectors and hedge against major downturns. This means their returns are not as high during crypto market bull cycles but losses are also contained during bear cycles.
The average crypto hedge fund is up around 60% over the course of 2019 to July 31st, boosted by the 173% gains of bitcoin and the smaller but still significant returns of other major cryptocurrencies. Last year the sector returned losses that averaged around 70%. In 2017, crypto-focused hedge funds saw spectacular average gains of almost 3000%. But the extreme volatility of a majority of the 200 to 300 hedge funds in the sector has seen them more or less shunned by the institutional investors needed to really see the market develop.
There are also major due diligence concerns. Many crypto hedge fund managers are unable to answer to the same kind of performance histories as would be expected elsewhere in the hedge fund industry. Other qualities such as assets being held under the protection of custodians are also lacking. It’s a problem others in the space have also encountered. Block Asset Management, which runs a ‘fund-of-fund’ investing in crypto hedge funds has also stated that many of the funds it looks at fail to pass its due diligence framework.
However, Elwood Asset Management believes there are around 50 crypto hedge funds that could potentially satisfy its usual due diligence needs. Its platform is also expected to allow investors to specify the conditions under which they are prepared to invest in the crypto market such as level of risk to expected returns and liquidity requirements. The platform would then design a portfolio for individual investors that answers to their conditions.
The Elwood vehicle wouldn’t be cheap, with the company applying its own fee on top of that of the hedge funds that could be invested in. Industry averages from crypto hedge funds are a base fee of 1.7% plus an additional performance fee of 23.5%. That compares to average fees across the whole hedge fund industry of 1.4% plus a performance fee of 16.6%.