In recent years, institutional interest in crypto assets has grown exponentially. A 2021 survey by Fidelity Investments found that 7 in 10 institutional investors expect to buy or invest in digital assets in the future. As adoption increases, crypto fund management strategies are evolving to meet the needs of institutional crypto investors. This article explores some of the latest developments in institutional crypto fund management.
Crypto Hedge Fund Trends Gaining Traction
Crypto hedge funds are investment funds that generate returns through investing and trading in cryptocurrencies and digital assets. These funds utilise a range of quant trading strategies adapted for the volatile crypto markets.
Some of the most common crypto hedge fund trends include:
Statistical Arbitrage
This involves using quantitative models to identify pricing inefficiencies between cryptocurrency exchanges, allowing funds to buy low on one exchange and sell high on another. High-frequency trading algorithms are deployed to capitalise on tiny, short-lived price variations across exchanges.
Algorithmic Trading
Advanced algorithms automatically execute trades based on certain technical indicators and data points, rapidly entering and exiting positions to capture profits. Machine learning models enable more adaptive crypto trading strategies.
Market Making
Funds provide liquidity to exchanges by constantly buying and selling assets from their own inventory. They profit off the spread between the buy and sell prices while facilitating smooth trade execution.
According to PWC, assets under management (AUM) by crypto hedge funds grew from $3.8 billion in 2020 to over 8% ($4.1 billion) by the end of 2021. This exponential growth is expected to continue over the next 5 years as institutional investors allocate more capital.
Specialised Crypto Index Funds
Crypto index funds have emerged as an important passive management strategy for institutional investors seeking broad digital asset exposure. As the crypto market has grown, index funds have launched, tracking specialised sectors catering to institutional appetites.
Decentralised Finance Index Funds
Decentralised finance (DeFi) index funds track tokens and protocols aiming to recreate traditional financial services like lending and trading without intermediaries. As an example, the Bitwise DeFi Crypto Index Fund provides exposure to decentralised exchanges, stablecoins, oracles, derivatives, and lending/borrowing protocols.
Institutions find DeFi indexes attractive, given the innovation happening in sectors like decentralised lending. The total value locked in DeFi lending has grown over 3,000% from $650 million in 2019 to over $20 billion today. DeFi index funds offer easy access to this high-growth area.
Metaverse Index Funds
With Meta (formerly Facebook) prominently driving metaverse themes, several index funds now focus on metaverse-oriented crypto assets. For instance, the Metaverse Index Portfolio holds cryptocurrencies related to building virtual worlds, gaming ecosystems, NFTs, and the Web3 infrastructure to support them.
The metaverse sector has seen over $120 billion worth of investments. Index funds specialising in this space make it simpler for institutions to gain exposure compared to identifying and analysing individual metaverse projects.
Web3 Index Funds
Web3 represents the evolution of the Internet towards models based on decentralisation and blockchain technologies. Web3 index funds hold assets tied to building this next-generation Internet infrastructure.
The Bitwise Web3 Crypto Index Fund tracks layer 1 blockchains like Polkadot and Solana, along with decentralised cloud computing protocols, distributed data storage ventures, and more. As trillions of devices eventually connect to web3, these networks aim to provide the foundation.
By offering a diversified basket covering multiple facets of web3, index funds help institutions invest in what could be the future of the Internet itself.
Tailored Opportunity Zone Crypto Funds
Opportunity zones are designated economically disadvantaged areas where investors can defer or eliminate capital gains tax by investing through specialised funds. Cryptocurrency and blockchain projects are increasingly targeting these zones for development.
Some Emerging Crypto Fund Management Strategies Among Institutional Investors structure themselves as opportunity zone funds that focus investments into digital asset startups, protocols, and ventures located within qualified opportunity zones. Catering to impact-driven institutional investors, these funds offer attractive tax incentives while supporting wider blockchain innovation and local job creation.
For example, many asset managers are focusing on blockchain technology – and have partnered with a chance for low-income communities to benefit from the growth of cryptocurrency.
Outsourced CIO Services for Crypto Assets
Many mainstream institutional investors like pension funds, endowments, and family offices lack the internal expertise to invest and manage crypto asset portfolios directly. There is a steep learning curve to navigate wallets, custody solutions, regulations, and volatility.
To overcome this barrier, Outsourced Chief Investment Officer (OCIO) providers are increasingly offering to construct and manage custom crypto funds on behalf of institutions. OCIOs perform necessary due diligence, build diversified crypto fund portfolios, handle custody and reporting, and continue monitoring the rapidly evolving landscape.
By leveraging external specialist providers, more risk-averse institutional investors are increasing indirect exposure to crypto assets within their portfolios without having to build in-house capabilities.
Conclusion
As cryptocurrencies cement themselves in the mainstream investment landscape, institutional crypto fund management strategies continue to progress. From advanced quant trading crypto strategies to tailored index exposures and outsourced portfolio solutions, fund managers are innovating to accommodate the influx of institutional capital. These developments provide promising signs for further institutional adoption ahead as the crypto economy matures.
