Crypto hedge funds pool money from investors to invest in a number of crypto projects including blockchain companies, spin-off projects, and many other projects related to the digital asset industry.
Hedge Funds are investment vehicles that pool capital from multiple investors with the goal of securing higher investment returns. Typically, a wealthy group of investors join a hedge fund because it is easier for them to bear the high management costs and risks of investing in a hedge fund.
There are also hedge funds in the crypto market and they can open up a view of opportunities for investors. This article will focus on crypto hedge funds and how they work.
What are crypto hedge funds?
Hedge funds allow investors to benefit from a diversified pool of assets managed by expert professionals and their highly-skilled fund management team.
Currently, there are certain types of crypto hedge funds on the market. A type of crypto hedge fund manages portfolios that invest exclusively in cryptocurrencies. They can act as venture capital funds and invest in pre-ICOs (initial coin offerings), bringing newly offered cryptocurrencies from ICOs to the table.
In a volatile market like cryptocurrency, it can be quite risky, while the higher the risk, the higher the rewards. Therefore, these types of crypto hedge funds usually make more money.
The other type is the one who typically adds cryptocurrency and other digital assets to their existing portfolios that consist of a larger mix of various asset types. Such crypto hedge funds generally tend to avoid big risks in the market.
How do crypto hedge funds work?
As mentioned above, cryptocurrency hedge funds pool money from investors to invest in a number of cryptocurrency projects including blockchain companies, spin-off projects, and many other projects related to the digital asset industry.
Crypto hedge funds charge a management fee to take care of their investment portfolio and generate profit for investors. Typically, the administration fee ranges from 1 to 3 percent of the amount invested. Apart from the management fees, most of the time, investors have to pay a percentage of the profits made as performance fees to the team of experts who manage their assets. Performance fees can be quite high and depend on the nature of the management.
To join a crypto hedge fund, investors are usually required to pay a high minimum deposit. For example, Grayscale Bitcoin Trust or GBTC charges a minimum annual fee of 2 percent. Other than that, the minimum amount an investor must pay to participate in the GBTC is $50,000, which is not something a regular or small-scale investor would pay. In addition, there are premiums that investors must pay if they are willing to buy stocks when the market is trending up.
regulatory scenario
The regulations on traditional hedge funds are quite different from crypto hedge funds. Especially, after the back-to-back debacles that occurred over the past year, the US government and the rest of the world are trying to impose strict regulations on cryptocurrency-related businesses.
However, it is important to note that crypto hedge funds that only handle cryptocurrencies in their portfolios do not have to register with the US Securities and Exchange Commission (SEC). This is because the government must still labeling cryptocurrencies as a security, although it can happen abruptly, given the circumstances that occurred over the past year.
Hedge funds that combine other forms of assets, such as stocks with cryptocurrency, are not required to register with the SEC. However, if the total value of AUM (assets under management) exceeds $150 million, then they would need 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.
Conclution
Crypto hedge funds are investment vehicles managed by industry experts with the goal of generating returns in the highly volatile crypto market. On the other hand, they are a bit expensive and are generally intended for high value investors.
