Hedge funds ride 2020’s crypto boom to rally 156%

An index tracking hedge funds that invest in cryptocurrencies including bitcoin surged 52% in November, bringing the year-to-date return to a whopping 156%.

That’s according to analysis and research firm HFR, which posted the performance of its HFR Cryptocurrency Index.

Hedge funds have warmed to cryptocurrencies as bitcoin boomed with a rally that is on track to end the year some 305% higher. In November, Financial News reported that one manager of a bitcoin exchange-traded product received as much as $3m a day in inflows — which in 2019 took the whole month to attract — and that the investors are overwhelmingly institutions, rather than individuals.

“Investors are actively increasing exposure to hedge funds, including cryptocurrency strategies,” Kenneth J. Heinz, president of HFR, said in the firm’s HFR Market Microstructure Report.

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There is now “a greater urgency by institutional investors to not miss out — to invest some of their assets in bitcoin,” Nikolaos Panigirtzoglou, a cross-asset research analyst at JPMorgan, told Financial News in November.  This has been prompted by a perception of bitcoin as a credible alternative asset to gold.

Tech has also proved a smart strategy for hedge funds. Over the first 11 months of the year, the HFRI 500 EH: Technology Index posted a 23.5% return, HFR found.

Hedge funds overall have struggled to consistently beat returns of equity indexes. Global hedge funds gained 4.49% in November, their best month since 2009, and posted a more than 8% gain in the first 11 months of the year, hedge fund tracking firm Eurekahedge found. But those returns pale to the performance of the S&P 500 Index, which is on track to finish 2020 with a 16% rally. The more than decade-long bull run in equities has seen the US equity benchmark post returns of 9.5% or higher in all but three years since 2009.

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There are some bright spots. HFR found that hedge fund debuts ramped up in the third quarter amid optimism on the outlook for the US economy, with new launches outpacing fund liquidations for the first time since the second quarter of 2018. New funds reached 151 last quarter, the highest number since the three month period ending in June 2019.

HFR said some 364 hedge funds launched in the first nine months of 2020, “a period which included a record low number of fund launches in 1Q as the global pandemic began.” About half of the estimated 619 funds that liquidated over that time did so in the first quarter, the firm found.

“Hedge funds have successfully navigated extreme dislocations throughout 2020 and, as a result of this, are likely to continue attracting institutional investors as a portfolio mechanism … while opportunistically positioning for elevated levels of volatility across asset classes into 2021,” Heinz said.

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HFR found that fund liquidations fell to an estimated 137 in the third quarter, the lowest since 2Q18, a 50% decline from the 304 liquidations in the first quarter.

And fees are coming down. Average hedge fund management fees hovered at an estimated 1.37% over the past two quarters while the average industry-wide incentive fee declined by 1 basis point to end the third quarter at 16.36%.

“Both figures represent the lowest level for both fees since HFR began publishing these estimates,” HFR said.

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To contact the author of this story with feedback or news, email Trista Kelley