How Do Crypto Hedge Funds Work?
Anyone familiar the the research and investing style of crypto hedge funds? Are they just buying up tokens they think have potential or are they constructing portfolios using the derivatives like you can get on FTX? How does the experience differ from going to say an L/S equity fund?
I am curious as well. From my observation, although they may say they are doing L/S, they probably long-only. Many PM spend most of their time promoting Crypto like a salesman, rather than working on capturing alpha. At this stage, their AUM is probably linked more to the popularity/price of Crypto, than their actual fund performance/return.
I am a minority owner in the GP of one.
There is no website, no marketing, and the two guys involved are not on Twitter with their real identities. (I assume they each tweet pseudonymously.) Annual performance has never been lower than 70%. These guys live and breathe this stuff, it's religion to them, so obsessively monitoring and manipulating opportunities gives them their high.
The simple answer is that there's an incredible diversity in how crypto funds operate.
Some mimic traditional hedge funds. I have seen and met people running what you could call long/short, quant, long only, relative value strategies and more. Many do a lot of venture deals, just not for the companies that you see Paradigm, A16Z, DCG, Pantera, USV, or the 'mainstream' venture firms investing it - rather, for the obscure ones who may be building something less for the benefit of the world and more for the benefit of themselves. Like buying a massive block of an ICO in an unannounced presale, anchoring the ICO publicly, and then doing unlisted sales to another fund to take profit.
The only factor that seems to correlate with the sophistication of the strategy is the sophistication of the prior background of the partner(s).
It's a fascinating space. You can get absolutely ungodly returns if you can stomach the risk. Increasingly, UHNW and family offices are starting to get into the space with a fire-and-forget check.
Approximate AUM? How has the strategy scaled with 70% annual returns over (3? 4?) years? Always curious how much room there is for crypto funds - and it makes sense it's massively diverse.
Sorry for the delayed response, I find it harder to enjoy time on this site nowadays.
It began between $25-50m at inception. It's now approaching $1b, with the mix that you'd assume of heady returns plus new fund flows.
How much room is there? May be hard to picture, but there are literal neckbeards sitting in dark rooms in random cities in random countries minting millions in shit you or I never heard of. They don't raise capital because their entire ethos is the 'degen' thing people meme. Working is tired, aping into something is wired. So there's a bunch of eight or nine-figure capital pools that in your and my language would be termed entirely principal capital. No deck will ever get made, no materials will ever be distributed, and for good reason. Why bother? If you're at the vanguard of a tidal wave, do you stop to build a boat other people can get on? For most people, no, you keep surfing.
Curious to see where this ends up in 10 years
Based upon my review of a few crypto funds, they tend to either run a high sharpe strategy, arbitrage opportunity, or low sharpe (beta pretty much). Nothing super fancy AFAIK.
Basically every top crypto fund today is multi-strat. The best performers run quant strategies, L/S fundamental strategies, increasingly participate in venture style deals (that usually just give tokens in lieu of equity through a SAFT or a typical token purchase agreement), and momentum and macro strategies without much regard to differentiation between pools of capital.
That said Market Neutral is the fastest growing space in the market today. Almost every reputable shop raising market neutral funds are filling out the book within a month or two. Whereas the high beta new funds, even from places like Pantera (who is raising a multi-strat fund now), are taking a bit longer to place. Scalability and liquidity is a problem in a lot of these strategies, but with money pouring in and funds having the ability to charge premiums (2/20 with a ratchet to 2/30 is common and 5-10 year lock ups) they are just expanding the mandate vs limiting the fund raises.
How are they supposed to run L/S and market neutral strategies when the whole market moves based on price fluctuations of BTC and ETH
Encourage you to do some reading if this is actually interesting to you, but the market neutral stuff isn’t that hard. Basis trades, yield farming with hedged short positions, funding rate arbs, fx arbs (e.g. kimchi premium), etc.
Long/short - correlation to btc (and to a lesser extent ETH) continue to lessen. And sector specific strategies (e.g. gaming, DeFi last year) have outperformed in recent time periods broad baskets. Not complicated, just requires understanding where the puck is going and being right.
Adjacently relevant question is how many hours those research associates work if the market never closes...
More than L/S equity but less than banking/PE. Also participating more in the upside at more junior levels than in the traditional world.
'm a small RE and PE fund owner. Always been a serial entrepreneur out of undergrad and I have some serious input on this.
The crypto space is not as smart as those in equities, FX and other mature financial instruments... thus, this space can produce large returns.
I took some of my personal capital and started a hedge fund about 2.5 yrs ago.
Right now I have 2 employees (Traders) who run my fund while I run my PE shops.
We produce on avg. over 200% over the last 2 yrs in crypto and about 26% in traditional equities (we use leverage when possible).
2021 was an amazing year for us because of the binance altcoin which made us about 1,000%
We're holding a small party this weekend for this crazy year.
In short, crypto can do so so well and if you know trading, give it a shot.
To give you context, I started as a broker, made & took my $MM to buy properties and LMM private companies, then sat down with a consultant to figure out the hedge fund space and built a traditional trading fund. 6 months into I saw the wild swings in crypto & decided to trade that as well, since we started doing crypto our annual returns have been.... pretty damn... insane......
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