The encryption hedging fund is developing rapidly, with family offices and high-net-worth individuals as the main investors.

A recent survey report revealed the investment situation of family offices and high-net-worth individuals in the encryption market. The data shows that the assets under management (AUM) of cryptocurrency-focused hedge funds grew significantly in 2019, jumping from $1 billion at the end of 2018 to $2 billion. Throughout 2019, fully discretionary long-only funds performed the best, with an average return of 42%.

It is worth noting that family offices and high-net-worth individuals have become the main force in hedge fund investments, accounting for 48% and 42%, respectively. An industry expert pointed out that since the outbreak of the COVID-19 pandemic, people's interest in encryption has become increasingly widespread.

Research shows that there are currently about 150 active encryption hedging funds, with nearly two-thirds (63%) established in 2018 or 2019. The activity level of the establishment of cryptocurrency funds is closely related to the price trends of Bitcoin. The surge in Bitcoin prices in 2018 seems to have acted as a catalyst for the establishment of cryptocurrency funds. However, as the cryptocurrency market showed a downward trend at the end of 2019, the number of newly established cryptocurrency funds also significantly decreased.

The report categorizes cryptocurrency hedging funds into four types: fully delegated long, fully delegated long/short, quantitative funds, and multi-strategy funds. Among them, quantitative funds are the most common, accounting for nearly half of the market share. In contrast, the market share of the other three strategies is relatively small, collectively accounting for about 50% of the entire cryptocurrency hedging fund market.

From the perspective of investor structure, family investment institutions and high-net-worth individual investors account for nearly 90% of all investors. Surprisingly, traditional venture capital funds and funds of funds have a relatively small share in cryptocurrency investments, while investments from pension funds, foundations, or endowments are almost nonexistent.

The number of investors in these funds is not large, with a median of 27.5 and an average of 58.5. The median average investment size is $300,000, and the average is $3.1 million. About two-thirds of the encryption hedging funds have an investment size of less than $500,000.

In 2019, the total assets managed by global encryption hedge funds were estimated to have exceeded $2 billion, doubling from $1 billion in 2018. The distribution of assets under management shows a clear Matthew effect, with a small number of hedge funds managing a large proportion of assets, similar to the distribution in the traditional hedge fund industry.

Compared to 2018, the assets under management saw significant growth in 2019. The proportion of cryptocurrency hedging funds with assets under management exceeding 20 million USD increased from 19% in 2018 to 35% in 2019. Larger funds not only attract new investors but also draw in larger investment amounts.

In terms of performance, the median increase in the performance of encryption hedging funds reached 74% by the end of 2019, while many funds that performed poorly in 2018 had to close down. Fully delegated long-only funds performed the best in 2019, with a median performance of 40%, higher than other strategies.

It is worth noting that Bitcoin rose by 92% in 2019, outperforming all encryption hedging funds. The poor performance of these funds may be related to the bear market of 2018 and their failure to capitalize on the rising market trend in 2019. Overall, these encryption hedging funds have acted more as tools to reduce market volatility rather than as catalysts for improving performance.

With the diversification of the derivatives market and the increase in liquidity, encryption hedging funds find it easier to hold short positions, allowing for the execution of more complex investment strategies. Nearly half of the surveyed funds hold short positions, and more than half use derivatives. About one-third of encryption hedging funds are involved in futures and options trading products.

In leveraged trading, the proportion of cryptocurrency hedge funds using leverage rose to 56% in 2020, but the actual active use of leveraged trading was only 19%. In the future, it is expected that more cryptocurrency hedge funds will be allowed to use leverage in their investment prospectuses, but considering the increasing difficulty of obtaining debt financing, the growth in this area remains uncertain. Additionally, more investors may utilize derivative instruments to gain leveraged exposure in the future.