Traditional Hedge Funds Not Deterred by Crypto Market Downturn and Volatility

While the general cryptocurrency market has been in the red for most of 2022, recent reports reveal that more traditional hedge funds are still investing in digital assets, with the number of such entities estimated to reach 300.

More Traditional Hedge Funds Getting Into Crypto

According to the 4th Annual Global Crypto Hedge Fund report by PricewaterhouseCooper (PwC), 89 hedge funds were involved in a survey conducted in Q1 2022.

The research revealed that 38% of traditional hedge funds were already investing in cryptocurrency, a jump from 21% recorded a year ago. Also, two-thirds of the entities surveyed currently investing in digital assets are looking to increase their allocation by the end of 2022.

Last April, British hedge fund giant Brevan Howard planned to invest 1.5% of its capital into various cryptocurrencies. A previous survey from June 2021 revealed that nearly 100% of hedge funds intend to allocate 7.8% (on average) of their portfolios into crypto by 2026.

Traditional hedge fund managers not involved in such investment reduced to 62%, compared to 79% in the previous year. Meanwhile, 29% of those not purchasing digital assets are either making plans to invest or are at the late stage of their investment plans.

On the other hand, the PwC report noted the estimated number of specialist crypto hedge funds is 300 globally, adding that new entities have been created at an accelerated rate in the past two years.

The most-traded digital asset for crypto hedge funds was Bitcoin, with Ether coming second, followed by Solana, Polkadot, Terra, and Avalanche.

Regulatory Uncertainty a Major Hindrance for Crypto Investment

Although more traditional hedge funds are getting into crypto, most still exercise caution. According to the survey, 57% allocated less than one percent of their total assets under management (AUM) to cryptocurrency.

Also, 41% of asset managers not investing in digital assets said they are not likely to gain such exposure in the next three years. Another 31% are curious about cryptocurrency but prefer to wait till the market reaches robust maturation.

Meanwhile, regulatory uncertainty was the biggest barrier for respondents not involved in crypto investment, while hedge funds with such exposure said that the absence of tax and regulatory clarity was a major challenge.

Global Financial Services Leader, PwC United States, John Garvey noted that although the crypto market came with risks and volatility, that has not hindered the traditional hedge funds from making crypto investments.

“The recent collapse of Terra vividly demonstrated the potential risks in digital assets.  There will continue to be volatility, but the market is maturing and with that is coming not only many more crypto-focused hedge funds and higher AuM, but also more traditional funds entering the crypto space.”