Crypto Hedge Funds: How They Work?|
Crypto Knowledge

Crypto Hedge Funds: How They Work?|

written by John Murphy | April 13, 2023

2022 has seen the cryptocurrency market maturing as its correlation to U.S. equities reached an all-time high. Experts point to growing institutional interest in cryptocurrencies as one of the major players in driving high demand. One of the most significant factors that massively impacted a surge in crypto value is crypto hedge funds.

Key Takeaways

  • Crypto hedge funds are pools of cryptocurrencies where different investors contribute tokens for professionals to manage these funds to generate returns.
  • They are an ideal strategy for risk reduction in a highly volatile crypto market.
  • Crypto hedge funds are regularized and monitored by the Securities and Exchange Commission in the U.S.
  • Crypto hedge fund companies charge a management fee and ­performance fee on gains from the hedge fund.

Since it’s performance is rising, many users are hunting down the most considerable crypto hedge funds. However, as it is an advanced financial term, investors, especially newbies, need to educate about it.

This article will touch on all points related to crypto hedge funds, including the top 10 crypto hedge funds. In short, by the end of this article, you will have all the necessary information you need to understand better and tackle crypto hedging. Moreover, we will introduce crypto risk management hedge funds and different techniques.

Understanding Crypto Hedge Funds 

A hedging fund is a pool of money gathered from various investors to make positive returns. Generally, hedging funds are limited to wealthier investors as it requires high management fees. Moreover, a high minimum-deposit requirement and risks bar small to medium size investors away from hedging funds.

Likewise, a crypto hedge fund involves pooling funds for investment in digital assets. However, certain crypto hedge funds invest in commodities, equities and foreign currencies.

But the purpose is the same, to draw income by investing a more considerable amount collected from different investors.

Working of Crypto Hedge Funds

Crypto hedging funds invest in cryptocurrency products, including blockchain-based ventures, crypto-based derivatives, and other digital assets related to the broader blockchain and crypto industry

Since the main objective of hedging is to maximize participants’ return, they diversify investment in different crypto projects, like promising new coins to well-established tokens.

Generally, these hedging funds charge a 1% to 3% management fee on investment. Moreover, a performance fee is also payable subject to the positive return from investment. For instance, you invested $1 million with a performance of 10%. After one year, your initial investment has increased by $500,000 to $1.5M. So, you will have to pay a performance fee of 10% on $500,000 (that is $50,000).

Moreover, almost all hedging funds require a substantial minimum investment. Such a minimum amount varies from company to company.

Crypto Hedge Funds Regulations 

Currently, such crypto-hedging funds investing purely in cryptocurrency are not required to register with the Securities and Exchange Commission in the United States.

Contrarily, if a crypto hedging fund has a diversified portfolio and a collective valuation over $150 million, they have to register with SEC.

Moreover, if any crypto fund plans to invest in advanced financial setups like leveraged futures of Bitcoin futures, it needs to register with CFTC (Commodity Futures Trading Commission).

Crypto Risk Management Hedge Fund 

Many experts tip crypto hedge funds NYC as the means of risk management. Since hedging involves funds from multiple investors, thus the risk is divided and up to the limit of their investment only. 

Moreover, crypto hedging funds are managed by experts; hence, chances of losses are minimum and thus offer secure cover to investments.

Like a traditional financial hedging system, a crypto hedge is one of the best strategies to reduce risk and a perfect safeguard against adverse price movements.

In short, crypto risk management hedge funds are ideal for investors who want to invest large amounts in cryptocurrency while aiming to minimize their risks and incredibly rapid price fluctuations.

Advantages and Disadvantages of Crypto Hedging

Crypto hedging funds offer several advantages to investors. Naturally, with benefits, specific risks and disadvantages are also associated with them.

Here are the pros and cons of crypto hedging funds AuM (asset under management).

Pros

  • Highly skilled professionals manage hedging funds.
  • Low chances of scams.
  • High return potential due to increased risk/high return strategies.
  • Diversification of investment.
  • Reduces over-reliance on traditional finance and crypto trading.
  • Risk mitigation as it acts as a pool of investment from different investors.

Cons

  • Potentially high-performance fees may reach as high as half of the generated return.
  • Limited to wealthy investors only.
  • Increased risk due to cryptocurrency volatility. 

Frequently Asked Questions

What are the biggest crypto hedge funds?

The following are the most considerable crypto hedge funds.

  • Wave Financial
  • Pantera Capital Management
  • Bitwise Asset Management
  • 10T Holdings
  • Grayscale Investments

Are crypto hedging funds risk-free?

The crypto market is highly volatile, and although crypto hedging funds are a route to mitigating these risks, they do not entirely remove risks associated with crypto trading. Therefore, do thorough research before adopting a crypto-hedging strategy.

Are crypto hedging funds legal?

Crypto hedging is legal and covered by SEC; however, funds less than $150 million in valuation do not need registration.

How to start a crypto hedge fund?

You can follow the below steps to start your crypto hedge fund.

  • Involve professionals
  • Fulfill legal requirements
  • Invite potential investors
  • Register investors
  • Select and start diversified investments

Parting Thoughts

With crypto hedge funds performing over the last year, many investors have selected a way to mitigate risk in such a highly volatile crypto market.

Since hedge funds are a pool of money from different participants, the risk is divided into equal portions. Moreover, these funds tend to generate high returns since investments are heavy.

The most significant crypto hedging funds include Yuga Labs, with a total value of $450M, Polygon, which has a value of $450M and Circle, which has a valuation of $400M.

Furthermore, crypto hedge fund jobs are also on the rise, attracting bright minds from the crypto industry. Therefore, there are bright chances of hedging funds to boom.