Key Takeaways
- • Coinbase's second edition of the Coinbase Allocators Guide to Digital Asset Hedge Funds estimates dedicated crypto hedge funds manage under $50bn in aggregate AUM, less than 2% of traditional hedge fund assets.
- • The number of dedicated crypto hedge funds has risen sixfold since 2018, but Coinbase estimates fewer than one third of the roughly 1,000 crypto-dedicated funds are ready for institutional allocator capital.
- • More than 80% of crypto funds have less than $50m in assets, and only 5% have more than $500m.
- • Brevan Howard, Man Group and Millennium Management are adding exposure and resources to launch or expand dedicated crypto strategies, while hedge fund veterans are moving into crypto-focused funds.
- • Over the five years ending March 2024, a 2% bitcoin allocation would have raised annual returns by 2% with a 25 basis point rise in volatility, lifting the Sharpe ratio from 0.41 to 0.58, per Coinbase and Preqin data.
Summary
A Coinbase report finds that the dedicated crypto hedge fund sector is institutionalizing, though it remains small and fragmented. According to the second edition of the Coinbase Allocators Guide to Digital Asset Hedge Funds, the number of dedicated crypto hedge funds has risen sixfold since 2018 as of the first quarter of 2024. Coinbase estimates aggregate assets under management below $50bn, or less than 2% of traditional hedge fund assets. The report notes that while multiple data sets track approximately 1,000 dedicated funds, less than one third are ready for institutional allocator capital. More than 80% of crypto funds hold less than $50m in assets, and only 5% exceed $500m.
Coinbase points to growing participation from established hedge fund managers. Brevan Howard, Man Group and Millennium Management are adding exposure and resources to launch new dedicated crypto strategies or expand existing ones, and many hedge fund veterans are leaving traditional funds to start or join crypto-focused managers. Coinbase compares the opportunity to the emergence of hedge funds in the 1990s, at the onset of electronic and high-frequency trading. The report also says many emerging managers now have three-year track records and have strengthened risk management and built teams with experience across multiple crypto market cycles.
The approval of US spot bitcoin and ether exchange-traded funds by the Securities and Exchange Commission has further drawn traditional hedge funds into the asset class. Coinbase cited first-quarter 2024 13F filings that list Point72, Farallon Capital Management, Millennium Management, Boothbay, Renaissance Technologies and DE Shaw as holders of bitcoin ETFs. The State of Wisconsin Investment Board, one of the largest US pension funds, was also a direct holder.
Performance data from Coinbase and Preqin, the private markets data provider, indicate that hedge funds on average outperformed bitcoin during the 2017-2018 and 2021-2022 bull markets. Over the five years ending March 2024, a 2% bitcoin allocation would have added 2% to annual returns, with only a 25 basis point increase in volatility, raising the Sharpe ratio from 0.41 to 0.58. Active management, including token selection, portfolio optimization and drawdown control, outperformed a spot-only bitcoin allocation. Three of four primary dedicated crypto hedge fund strategies tracked by the Preqin Index since 2018 beat holding spot bitcoin or long-only exposure. Coinbase said the best-performing category was quant/active, followed by multi-strategy, market neutral and long-only, while long-only strategies generally underperformed spot bitcoin, which it attributed to limited drawdown risk management, exposure to underperforming altcoins and poor timing on the rebound.
Coinbase points to growing participation from established hedge fund managers. Brevan Howard, Man Group and Millennium Management are adding exposure and resources to launch new dedicated crypto strategies or expand existing ones, and many hedge fund veterans are leaving traditional funds to start or join crypto-focused managers. Coinbase compares the opportunity to the emergence of hedge funds in the 1990s, at the onset of electronic and high-frequency trading. The report also says many emerging managers now have three-year track records and have strengthened risk management and built teams with experience across multiple crypto market cycles.
The approval of US spot bitcoin and ether exchange-traded funds by the Securities and Exchange Commission has further drawn traditional hedge funds into the asset class. Coinbase cited first-quarter 2024 13F filings that list Point72, Farallon Capital Management, Millennium Management, Boothbay, Renaissance Technologies and DE Shaw as holders of bitcoin ETFs. The State of Wisconsin Investment Board, one of the largest US pension funds, was also a direct holder.
Performance data from Coinbase and Preqin, the private markets data provider, indicate that hedge funds on average outperformed bitcoin during the 2017-2018 and 2021-2022 bull markets. Over the five years ending March 2024, a 2% bitcoin allocation would have added 2% to annual returns, with only a 25 basis point increase in volatility, raising the Sharpe ratio from 0.41 to 0.58. Active management, including token selection, portfolio optimization and drawdown control, outperformed a spot-only bitcoin allocation. Three of four primary dedicated crypto hedge fund strategies tracked by the Preqin Index since 2018 beat holding spot bitcoin or long-only exposure. Coinbase said the best-performing category was quant/active, followed by multi-strategy, market neutral and long-only, while long-only strategies generally underperformed spot bitcoin, which it attributed to limited drawdown risk management, exposure to underperforming altcoins and poor timing on the rebound.
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