Mapping Out The Growing Crypto Fund Universe

Crypto funds are a relatively new type of investment vehicle which has been experiencing significant growth in recent years. They aim to bridge the gap to crypto investments for professional and institutional investors. Through these new crypto funds, many of the high entry barriers for first-time crypto investors (such as a lack of infrastructure and knowledge) can be overcome. Funds serve as a single point of access, they are a well-known and easily investible vehicle, curated and managed by teams of crypto and asset management experts. High net worth individuals (HNWIs) and family offices together amounted to more than 80% of all professional crypto investors in 2021, with family offices also showing increasing interest [1]. Most of them invest via crypto funds. A rising acceptance in the general population and a more positive perception of digital assets overall also played a part in the growth of this new type of fund. This article will explore the nascent crypto fund universe and provide insight into different investment strategies, preferred domiciles, and AuM growth.
Authors: Albert Sugiharto, Maximilian Bruckner

Crypto funds continue to grow in number

While still small when compared to the vast number of traditional hedge funds, the crypto fund universe has grown to over 1,000 different funds to date. All this in a relatively short time since professional investors have begun showing interest in crypto [2]. As illustrated in figure 1, the most growth so far was observed in 2018, more than in all previous years combined. Unfortunately, this was also the beginning of the “crypto winter”, a prolonged period of high volatility and bearish sentiment in crypto markets. Hence, fewer new crypto funds were launched since 2019 than in 2018. Nonetheless, we expect the amount of freshly launched funds to continue to grow every year, as more and more institutional investors look to add crypto to their portfolios. There is still plenty of space for new players to enter the market.

Figure 1: Inception year of crypto funds

In line with the growing number of crypto funds, their total AuM also grew. By the end of 2021, the cumulative AuM of crypto funds reached more than USD 69 billion. This is more than double the amount of the same period in 2020 (36 billion USD) [3]. We believe that two factors contributed to this massive increase. First, there is a consensus in the market that crypto is here to stay. HNWIs and family offices are among the early adopters of new investment vehicles, and with fear of inflation and rising acceptance, there is even more urgency now to invest in crypto. Second, crypto funds have quite consistently outperformed Bitcoin over the past years. This is due to their exposure to various altcoins, and ability to correctly diversify across different crypto assets. Picking the right altcoins requires expert research. Funds, with their expert teams, are therefore a great way to invest in a well-diversified basket of cryptocurrencies.

Massive capital inflow is expected from traditional hedge funds and institutions

More than a fifth of institutional investors and a quarter of traditional hedge funds are planning to further increase their exposure in crypto assets. Considering that a third of these hedge funds manage more than 10 billion USD AuM, the capital inflow to crypto in the coming years will be massive [4]. It will be interesting to see how this capital will be spread amongst crypto funds. Figure 2 shows the current distribution of AuM per fund. Considering that most of the funds were launched after 2018, it makes sense that most of them still have AuM under 10 million USD. The players that were around before 2018 (in some cases since 2013) usually boast AuM in the billions — but they are few and far between.

Figure 2: Breaking down the crypto fund universe by AuM per fund

So, although most of the money is highly concentrated in a handful of funds and asset managers with a longer track record, we expect medium-sized funds to receive a large piece of the new pie. Hence, the number of crypto funds managing 10 to 50 million USD should gradually shrink as they benefit from the incoming capital from hedge funds. These funds have a decently long track record and are still small enough for investors to connect and establish relationships with their up-and-coming crypto asset manager. The number of funds managing 10 million USD and less should remain fairly constant as new funds take the place of those growing over 10 million. Of course, institutional investors are expected to target funds managing 100 million USD and upward. Very few crypto funds currently manage over 1 billion; we expect this group to grow in number as institutions enter the game.

Most crypto funds are just a new breed of tech-VCs

Not all crypto funds are the same. In fact, even in such a young universe like this, we can already differentiate between a number of strategies. As evident in figure 3, more than half of all crypto funds are venture capital funds. These funds are the same as any tech-focused VC fund, only they focus exclusively on blockchain startups. It comes as no surprise that they make up the biggest portion of crypto funds. Equity-based investments are much simpler, there is much less regulatory uncertainty, and it’s much easier to “sell” investing in a startup than in a token. Venture capital is something most investors are already familiar with, the jump to blockchain seems more manageable this way. However, it is interesting to note that, on average, the return on these VC-based strategies is smaller than that of discretionary long and long/short strategies. These actually yield the highest return, followed by quantitative and/or arbitrage [1].

Figure 3: Different investment strategies of crypto funds.

Other strategies can essentially be divided amongst directional and market-neutral funds, with the directional funds far outnumbering those pursuing market-neutral strategies. Directional funds tend to pursue strategies focused mostly around long/short positioning, while market-neutral funds engage in arbitrage and market-making. These are generally the more trailblazing asset managers of the bunch — they invest exclusively in tokens and offer much better liquidity than their VC counterparts.

Most crypto funds are domiciled in the Cayman and the British Virgin Islands

To see 43% of crypto funds domiciled in the Cayman Islands or BVI should come as no surprise — most of their hedge fund counterparts are found in similar locations. However, a distinction should be made between the legal domicile and the location of the managers running the fund. According to a 2021 study by PwC, most crypto funds managers actually call the United States their home, followed by the UK and Hong Kong [1]. Also, many crypto funds follow the idea of a decentralized workforce, much in the spirit of the rest of the blockchain community.

Figure 4. Crypto funds by legal domicile.

A notable position is also held by Switzerland, with 10% of crypto funds domiciled there. A logical reason for this is the friendly tax environments, as well as fairly clear and advanced crypto regulation. Crypto Valley, a hotspot for blockchain startups, is also in Switzerland after all.

There is still plenty of space in the market

This universe is still in its infancy. Most crypto funds are tiny when compared to the volumes managed by traditional hedge funds. As these hedge funds and institutions look to increase crypto exposure, the crypto fund market should grow drastically. There will be more demand for different vehicles, and we expect the VC dominance to somewhat decrease as direct investments in cryptocurrencies increase. Additionally, we expect demand for arbitrage strategies to grow, due to their low drawdowns and volatility. However, for all of this to truly take shape, we need more regulatory certainty, especially in the US.

Remarks

Please note that this analysis neither represents financial advice nor is it supposed to be understood or interpreted as a solicitation to buy or sell any securities, coins, or tokens. Any opinions (which may be subject to change without notice) expressed in this article are the authors’ personal opinions. The authors do not guarantee, of any sort, the accuracy, or completeness of any information or analysis supplied.

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About 21e6

21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products. 21e6 Capital has analyzed over 1,000 crypto funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Backed by a highly experienced team of crypto and finance experts with in-depth knowledge in digital assets and DLT, 21e6 Capital created a unique quantamental strategy that is aimed at achieving crypto-like returns while minimizing risk and volatility to global equity levels. The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance publications and research, ensuring state-of-the-art crypto investment solutions for financial industry professionals.

Authors

Albert Sugiharto is a Sales and Marketing Associate at 21e6 Capital. Albert has gathered experience as a management consultant focused on strategy, organization, and change management. He graduated from the Technical University of Munich and did expansive research on Security Token Offerings with Prof. Dr. Philipp Sandner. Albert holds the Lean Six Sigma Yellow Belt certification. Alongside his engagement at 21e6 Capital, he is involved in the ITC Working Group of the International Token Standardization Association, which researches and classifies hundreds of tokens every year. He also supports numerous blockchain startups at the Blockchain Founders Group. You can reach Albert for more information on this article and 21e6 Capital at albert.sugiharto@21e6.io.

Maximilian Bruckner is Head of Marketing & Sales at 21e6 Capital AG. Prior to this, he was engaged as Executive Director of the International Token Standardization Association (ITSA) where he focused on research and classification of crypto assets according to the International Token Classification (ITC) framework. He was heavily involved in the creation of the world’s biggest token database for classification and identification data on tokens (TOKENBASE). Maximilian graduated from the Frankfurt School of Finance and Management and did academic research in close consultation with Prof. Dr. Philipp Sandner. You can contact Maximilian via e-mail at maximilian.bruckner@21e6.io to request more information on 21e6 Capital AG or ask any questions regarding this article. You can also follow Maximilian on LinkedIn (https://www.linkedin.com/in/max-bruckner/) to stay up to date.

References:

[1] PwC — 3rd Annual Global Crypto Hedge Fund Report (2021)
[2] Fidelity Digital Assets — The institutional investor digital assets study (2021)
[3] CryptoFund Research — Q4 2021 Report (2021)
[4] EY — Global alternative fund survey (2021)