This follow-up analysis, yet again based on the 21e6 Crypto Fund Database, explores the five most common directional strategies by crypto funds. We have previously covered the opposite strategy, market-neutral funds, in an article that we link here for your convenience.
Figure 1: Number of crypto funds by category (only directional strategies).
#1: Fundamental/Thesis-Driven Crypto Funds:
Topping our crypto fund list are discretionary funds with 103 funds worldwide. These funds have no purely systematic investment process, meaning that humans are responsible for the final investment decisions. Discretionary strategies usually analyze the fundamental characteristics of tokens, ranging from on-chain activity over token supply/inflation to the total addressable market of a token project. These funds, like most other directional funds, tend to move with the markets. Most of these funds are currently in deep drawdowns.
#2: Quantitative Directional Funds:
Systematic funds, as opposed to the directional funds that we have just discussed, make the second place with 54 funds worldwide. This is a bit more than half of the number of discretionary funds. Quantitative funds follow automated trading rules. Those are often trend and reversal strategies akin to price-action strategies in equity markets. While some quantitative strategies can quickly adopt to falling markets, most funds in our database are also in heavy drawdowns and perform only slightly better than discretionary funds in crises.
#3: Multi-Strategy Directional Funds:
The 43 multi-strategy directional funds bundle directional in one fund. They may also take some non-directional strategies in their portfolio. Please note that multi-strategy fund are not the same as fund of funds. While fund of funds invest in several funds and do not actively manage portfolio constituents themselves, multi-strategy funds perform their own trades.
#4: Long-Short Funds:
The forth most common strategy are long-short funds, with 23 managers falling into this bucket. In the traditional hedge fund space, these managers are often referred to as “CTAs” (Commodity Trading Advisor). These managers may benefit from falling crypto prices if positioned correctly. They are classified as directional because they move with or against the market, thus taking directional exposure in one way (long) or the other (short). Some long-short funds were hit badly by the FTX implosion as FTX was one of the main derivatives exchanges for crypto assets.
#5 Fund of Funds:
There are significantly fewer fund of funds than multi-strategy funds in the 21e6 Crypto Fund Database. With 21 directional fund of funds, there number is less than half of that of multi-strategy funds. Crypto fund of funds provide a high degree of diversification with relatively small investment tickets. Investors often need to provide at least USD 100,000 to subscribe to a crypto hedge fund. To diversify across funds, one needs to write multiple 100k tickets. Fund of funds alleviate this issue. Furthermore, fund of funds reduce the operational overhead for due diligence and portfolio monitoring. On other hand, they come with extra costs of typically 1/10 (1% management fee + 10% performance fee).
While directional crypto funds have suffered from the market drawdown, many of them were relatively resilient to the FTX crash as they often hold their assets in cold wallets, unlike non-directional/market-neutral funds. So while directional funds may fluctuate heavily, they usually incur less operational risk then non-directional funds.
We expect discretionary crypto funds to remain the largest group of directional funds, and we think that the number will steadily increase as the market recovers. A development to keep in mind is the regulatory environment around cryptocurrencies in the USA.
21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products.
Please find more information about our authors on our homepage: 21e6.io
Jan Spörer is Due Diligence Manager at 21e6 and responsible for overseeing the content quality management of the 21e6 Crypto Fund Database.