Cryptocurrency hedge funds see returns plunge in volatile times

Hedge funds investing in cryptocurrencies have seen plunging returns this year, with performance dropping by 35 per cent as digital coins suffered a volatile first half.

Figures from US analytics firm HFR showed that global hedge funds investing in cryptocurrencies and the technology that underpins digital money have posted negative performance in four out of five months this year, after rising more than 2,700 per cent in 2017.

According to the HFR Blockchain Composite index, crypto hedge funds were down 17 per cent in May, after rising 45 per cent in April.

The negative returns come amid a tough few months for digital assets, with bitcoin losing more than half its value this year, falling to $6,600 from about $17,500 at the start of the year. The drop has reduced the market cap of bitcoin from nearly $300bn to just over $100bn, according to Coinmarketcap.com.

Friday, 8 June, 2018

Concern over a regulatory crackdown on the sector has fuelled negative sentiment and price volatility, analysts said.

“I expect the crypto markets to remain volatile for the foreseeable future,” said Henri Arslanian, fintech and cryptocurrency lead for Asia at PwC. “Whilst retail investors may see volatility in the crypto markets as a downside, many crypto funds see it as an opportunity.”

He added that the “long term positive impact of the number of institutional players entering” cryptocurrency investment was more important than short-term price fluctuations.

However, bitcoin and another cryptocurrency, ether, were given something of a reprieve on Thursday when a US Securities and Exchange Commission official indicated that they were not securities and therefore did not need to be registered, which would leave them outside the regulator’s jurisdiction.

A number of specialist hedge funds have been established over the past few years to take advantage of the cryptocurrency boom. Pantera Capital, for example, was founded in 2013 and claims to be the first US bitcoin investment firm.

In Asia, a number of crypto-focused funds have recently emerged, including Kinetic Capital, which invests in blockchain technologies.

Interest among Asian investors is surging, according to Josh Gu, director of quantitative research at the HFR index division. “Cryptocurrencies have been very volatile, the topic is still hot in China and Japan.”

He said cryptocurrencies appealed to individual investors with a large risk appetite. “However, the [Chinese] regulator has banned some of the crypto trading platforms because of risk, so some investors might have panicked.”

A number of cryptocurrency trading venues have also suffered from high-profile hacks. Earlier this year, Japan’s Financial Services Agency raided the offices of Coincheck to examine its response to a digital attack that caused more than $500m in losses.

Yapian, which operates the Youbit exchange in South Korea, entered bankruptcy proceedings at the end of last year after hackers stole Won5.5 billion ($5 million) of bitcoins — 17 per cent of its assets.

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