Some of the world’s largest hedge funds are increasing their investments in cryptocurrencies, as they look for more profitable ways to trade the market.
Billionaire hedge fund veterans, Alan Howard of Braven Howard Asset Management LLP and Paul Tudor Jones of Tudor Investment Corp, are some who have expanded crypto trading into their firms. For example, Braven Howard launched a cryptocurrency hedge fund earlier in the year that would focus on speculation and arbitrage. The hedge fund also created a new crypto division in September, which currently has 12 portfolio managers overseeing $250 million. Meanwhile, $15 billion New York hedge fund Hudson Bay Capital and other large firms have reported increasing profits from trading cryptocurrencies.
hedge fund strategy
One reason for the growing interest is that many of these firms have found a way to trade cryptocurrencies as if they were just another asset class. “More funds see crypto as the fifth asset class,” said Robert Bogucci, Co-Head of Global Trading at Galaxy Digital Holdings Ltd. “It’s big enough now.” For this reason, Bogucci and others have noted that traditional hedge fund trading techniques often seem appropriate for crypto trading. This was found to be especially true for those concerned with price and volume trends.
Another attraction of relatively new crypto markets is that they are full of “inefficiencies” that well-endowed investment firms are able to capitalize on with timely and accurate information. The legacy experience of these firms also works in their favor when dealing with individual and inexperienced traders who lack the skills to deal with fast moving funds.
Bogucci also commented that hedge funds are trading cryptocurrencies differently from other assets. For one, most hedge funds are avoiding short selling cryptocurrencies. Their notorious volatility can easily lend itself to disastrous price increases, which can easily reverse but sustain losses. Also, most funds are buying tokens and trading futures instead of playing the options market. While the latter has proven difficult to trade, growth is still being reported.
Still doubts and risks
Many hedge fund giants remain skeptical about cryptocurrencies, despite the growing interest from many in the area. Doubts include whether cryptocurrencies can function as a currency, given their poor track record as a store of value and limited acceptance as a means of exchange. Their use for diversification has also decreased as crypto markets have started to behave similarly to traditional markets.
Trading crypto also has a number of unique constraints, crypto exchanges falling prey to hacks, and lost investments to shady industry players. Firms hoping to deal in crypto must also contend with regulatory requirements, which can run the gamut from non-existent to prohibition. Ultimately based on technology, cryptocurrencies are advancing at such an astonishing rate that many may find themselves unable to keep up.
“In many ways, trading crypto is similar to other trading assets, but with different types of risk,” says quant trader Agustin LeBron. “As long as you are ready to hit the button and make real trades, the crypto world can move on.”
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