The scale of encryption hedging funds is rapidly expanding, with family offices and high net worth individuals becoming the main investors.

A recent survey report revealed the investment situation of family offices and high-net-worth individuals in the encryption market.

Data shows that the asset management scale of hedge funds primarily based on encryption reached (AUM), which significantly increased in 2019, doubling from $1 billion at the end of 2018 to $2 billion. The best-performing fund throughout 2019 was the fully discretionary long-only fund, with an average return of 42%. In terms of funding sources, family offices and high-net-worth individuals accounted for 48% and 42% of hedge fund investors, respectively.

An industry expert stated, "Since the COVID-19 pandemic, we have observed a broader interest in encryption currency among people."

Most funds were established after 2018, using four main strategies.

Research has found that as of the first quarter of 2020, there were about 150 active encryption hedging funds, of which nearly 2/3(63%) were established in 2018 or 2019.

The establishment of encryption funds is highly correlated with Bitcoin prices. The surge in Bitcoin prices in 2018 seems to have driven the boom in the establishment of encryption funds. With the decline of the encryption market at the end of 2019, the number of newly established funds significantly decreased.

The report categorizes encryption hedging funds into four types:

1. Full authorization to go long: only going long, with a longer investment period, inclined to invest in early projects and highly liquid encryption currencies.

2. Full discretionary long and short: The strategy is diverse, including long and short, relative value, event-driven, etc., and also invests in early-stage projects.

3. Quantitative Funds: Use quantitative methods for directional or market-neutral investments, strategies include market making, arbitrage, etc., focusing on liquidity.

4. Multiple Strategies: Combine the above three strategies.

Quantitative funds are the most common, accounting for nearly half of the market. The other three strategies each account for about 17-19%.

Investors are primarily family offices and high net worth individuals.

Surveys show that the most common types of investors are family investment institutions (48%) and high-net-worth individuals (42%), accounting for a total of 90%. The participation of institutional investors such as pension funds and foundations is very low.

The median number of investors in these funds is 27.5, and the average is 58.5. The median average investment size is $300,000, and the average is $3.1 million. About 2/3 of the funds have an investment size of less than $500,000.

The report estimates that in 2019, the global assets managed by cryptocurrency hedging funds exceeded $2 billion, doubling from $1 billion in 2018. The distribution of assets shows a Matthew effect, with a few large funds managing most of the assets.

Compared to 2018, the proportion of funds with assets under management exceeding 20 million USD increased from 19% to 35% in 2019. Larger funds are more likely to attract new investments, but many investors will consider concentration risk.

Fully Managed Long Position Funds Perform Best

The sharp decline of the cryptocurrency market in 2018 led to an average performance of -46% for hedge funds. However, by the end of 2019, the median performance of cryptocurrency hedge funds rebounded to 74%. Some smaller funds were forced to close due to poor performance.

From different strategies, the median performance of multi-strategy funds in 2019 was 15%, lower than the quantitative ( 30% ), fully discretionary long-short ( 33% ), and fully discretionary long ( 40% ).

Overall, these funds play more of a role in reducing volatility rather than acting as a catalyst for increasing returns.

With the diversification and liquidity of the derivatives market increasing, encryption hedging funds can more easily hold short positions and execute more complex strategies. The strategies of encryption hedging funds are converging with those of traditional hedging funds.

The survey shows that 48% of the surveyed funds are shorting, and 56% are using derivatives. About 1/3 of the funds participate in futures and options trading. It is expected that in the future, as regulated encryption futures products increase, more funds will enter this field.

In terms of leveraged trading, only 36% of funds used leverage in 2019, rising to 56% in 2020, but only 19% were truly active users. The report suggests that more funds may be allowed to use leverage in the future, but the extent of growth remains unclear. Additionally, more funds may gain leveraged exposure through derivatives.