Some hedge funds that recently got into the cryptocurrency game did exceptionally well in 2017. (See also: The Rise of the Crypto Hedge Fund.)
Cryptocurrencies have grown immensely popular among individual investors, but institutional investors and mainstream financial companies have yet to attach themselves to the trend in large numbers. There are many potential reasons for this: cryptocurrencies are seen as highly speculative and risky investments, and many top financial professionals believe the entire industry is a bubble ready to burst. But nine crypto hedge funds produced outsized results last year.
1,167% Growth in 2017
A recent report by Bloomberg indicates that nine hedge funds linked to cryptocurrency investments rose by 1,167% as a group. This information comes via Eurekahedge Pte and was released as a preliminary figure separate from other numbers, including assets under management and individual returns.
By comparison, hedge funds as a global group brought in returns of 8% overall in the past year. Notably, the performance of these nine cryptocurrency funds still trailed that of bitcoin itself, which gained 1,403% overall in 2017.
More Than Speculation
While many hedge fund managers and other top investors are still reluctant to get into the cryptocurrency space, those hedge funds which have explored the burgeoning industry have found that they have access to more than just speculation over rising currency prices. (See also: New $500 Million Hedge Fund Will Focus on Cryptocurrency.)
Cryptocurrency hedge fund strategies might include early-stage equity investing, lending, and market making. In some of those cases, 2017 was not a banner year. In the future, though, they may help to provide some buffer against major downturns in the digital currency market.
Nonetheless, even this booming corner of the hedge fund world recognizes the extreme risk in the cryptocurrency space. Altana Digital Currency Fund, which gained nearly 1,500% in 2017 after fees, cautioned its clients that they should only invest a tiny portion of net worth in cryptocurrencies. There is still the very real concern that a cryptocurrency investor can lose all of the money she allocates to that space, should the bubble eventually collapse. (See also: Hedge Funds Reap Spectacular Returns From Cryptocurrencies.)
Many of the hedge funds linked to cryptocurrencies are brand-new, having been launched in recent years to capitalize on the rapid growth of the industry. As the digital currency landscape continues to grow and shift, more hedge funds may follow suit, provided that profits are still available to be made.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrencies.