Crypto Hedge Funds And How They Work

There are hedge funds in the crypto market as well and they can open up a vista of opportunities for investors. This article will focus on crypto hedge funds and how they operate.

What are crypto hedge funds?

Hedge funds allow investors to benefit from the diversified pool of assets that are managed by expert professionals and their highly qualified fund management team.

Currently, there are certain types of crypto hedge funds in the market. One type of crypto hedge fund manages portfolios that exclusively invest in cryptocurrency. They can act like venture capital funds and invest in pre-ICO (Initial Coin Offerings), bringing newly-offered cryptocurrencies from ICOs to the table.

In a volatile market such as that of cryptocurrencies, it can be quite risky, while the higher the risk, the higher the rewards. Therefore, these kinds of crypto hedge funds usually tend to make more money.

The other type is one that usually adds cryptocurrencies and other digital assets to their existing portfolios consisting of a bigger mix of various kinds of assets. Such crypto hedge funds usually tend to avoid huge risks in the market.

How do crypto hedge funds work?

As mentioned above, crypto hedge funds gather money from investors to invest in a flurry of crypto projects including blockchain ventures, derivative projects, and multiple other projects related to the digital assets industry.

Crypto hedge funds charge a management fee for taking care of your investment portfolio and churning out profits for the investors. Usually, the management fee ranges from 1 to 3 percent of the invested amount. Apart from management fees, most of the time, investors often have to pay a percentage of the profits earned as performance fees to the team of experts managing their assets. The performance fees can be quite hefty and depend on the nature of the management.

In order to join a crypto hedge fund, investors usually have to pay a lofty minimum deposit. For instance, Grayscale Bitcoin Trust or GBTC charges a minimum of 2 percent annual fees. Apart from that, the minimum amount an investor must pay to participate in the GBTC is $50,000, which is not something a regular or a small-scale investor would pay. Additionally, there are premiums that investors need to pay if they are willing to buy shares when the market is in an uptrend.

Regulatory scenario

The regulations around traditional hedge funds are quite different from crypto hedge funds. Especially, after the consecutive debacles that occurred during the previous year, the government in the United States and the rest of the world are trying to impose strict regulations on crypto-related ventures.

However, it is important to note that crypto hedge funds that only deal with cryptocurrencies in their portfolios, do not have to register with the Securities and Exchange Commission (SEC) in the US. This is because, the government is yet to label crypto as a security, although it may happen abruptly, given the circumstances that transpired during the previous year.

Hedge funds that combine other forms of assets such as stocks with cryptocurrencies do not require registering with the SEC. However, if the total value of AUM (Assets Under Management) exceeds $150 million, then they would either have to register with the SEC or the Commodity Futures Trading Commission (CTFC).

Some examples of the top crypto hedge funds in 2023 are Wave Financial, Pantera Capital Management, Grayscale Investments, Bitwise Asset Management, 10T Holdings, and others.

Conclusion

Crypto hedge funds are investment vehicles that are managed by industry experts with an aim to generate returns in the highly volatile crypto market. On the flip side, they are a tad bit expensive and generally meant for high-value investors.