[1/3]Representations of cryptocurrencies are submerged in water in this illustration taken on May 23, 2022. REUTERS/Dado Ruvic/File Photo
LONDON, July 11 (Reuters) - (This July 11 story has been corrected to add 'CoinShares' in paragraph 2 and 'funds that invest in cryptocurrency' in paragraph 4)
Global hedge funds that do not specialize in crypto assets have grown skittish about recent industry turmoil and this has led to a sector exit, a survey showed on Tuesday.
The share of traditional hedge funds investing in crypto assets has dropped to 29% this year from 37% in 2022, according to the report from PwC, CoinShares and the Alternative Investment Management Association (AIMA).
A quarter of those currently investing said increased uncertainty about US regulation of the sector may lead them to reconsider the asset class altogether, it added.
Market events of the past year affected the investment decisions of more than 70% of hedge funds invested in crypto. In total, 59 hedge funds were surveyed, which oversaw a combined total of $280 billion in assets, according to the report.
The crypto industry was rocked last year by a series of bankruptcies on major crypto firms, including major US exchange FTX. Investors suffered heavy losses as token prices plummeted and several companies froze customer withdrawals.
While the bitcoin price has rallied steadily this year, investors remain cautious as US regulators have stepped up action against what they say is an industry-wide culture of not complying with the law
โThe digital asset space has had to deal with deficiencies in its fundamental operations, including risk management, as well as allegations of corporate misconduct,โ AIMA Chief Executive Jack Inglis said in the report.
Traditional hedge funds that avoided trading cryptocurrency said deterrents included reputational risk, a lack of clear guidance from regulators and tax authorities, and unreliable data.
More than half of those surveyed who do not yet use crypto said they would wait for more updates to regulate it, according to the report.
Hedge funds that invest in crypto mostly use bitcoin or ether. Strategies for hedge funds investing in crypto assets included multi-strategy (41%), systematic (29%), macro (12%), and equity (12%).
Nearly half of the hedge funds already trading cryptocurrency said they would invest more money, but that cryptocurrency only made up 2% of assets under management.
Reporting by Nell Mackenzie and Elizabeth Howcroft; Edited by Dhara Ranasinghe and Alexander Smith
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