Hedge funds are entering the cryptocurrency ecosystem and reaping profits from the asset class's phenomenal performance this year.
According to a new note by research firm Morgan Stanley, funds specializing in bitcoin have an estimated $2 billion in assets under management (AUM). The number of hedge funds focusing on cryptocurrency has also shot up by 663% this year to 84. “2018 will likely be bigger,” the firm wrote in its report. (See also: New $500 Million Hedge Fund Will Focus On Cryptocurrency.)
Morgan Stanley’s report follows the launch of two new indices to track hedge fund investment in cryptocurrencies by data provider HFR Inc. The HFR Blockchain Composite Index tracks investments in blockchain, the underlying technology for most cryptocurrencies, since 2015. It is up by 282 percent since the start of 2017 and shot up by 1,522 percent this year.
The HFR Cryptocurrency Index, which is a sub-strategy index fund for its parent blockchain index, tracks direct investments and trades in cryptocurrencies. It is up by 292 percent since 2015 and increased by 1,641 percent since the start of the year through November. (See also: The Rise Of The Crypto Hedge Fund.)
Some hedge funds are raking in the moolah with spectacular returns from their investments. For example, San Francisco-based Pantera Capital recently posted lifetime returns of 25,004% for its bitcoin-focused hedge fund, which was started in 2013. In the last year, when bitcoin’s price trajectory took off, the fund gave its investors returns of over 1,900 percent. On a yearly basis, Pantera has racked up gains of 250 percent in its portfolio, which consists entirely of bitcoins.
Most of those gains have come on the back of growing awareness and adoption of blockchain among corporates and stellar performance of cryptocurrencies and, in particular, bitcoin. The original cryptocurrency started the year at $997 and almost touched $20,000 last week. At 16:39 UTC, it was trading at $16,218.01, down 8% in the last 24 hours. Other factors, such as the rise of automated trading and increased curtailment of activist shareholders (which limits their ability to generate returns), may also contribute to making bitcoin an attractive asset for hedge fund holdings in the future.
The entry of hedge funds follows the introduction of bitcoin futures trading at CME and CBOE earlier this month and should be good news for the cryptocurrency ecosystem. This is because institutional money adds liquidity to the system and smooths out short-term volatility and price swings.
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