The market size of encryption hedging funds has surged, with family offices and high-net-worth individuals as the market makers.

A recent survey report revealed the development status of cryptocurrency Hedging funds. In 2019, the asset management scale of cryptocurrency-focused Hedging funds increased from $1 billion at the end of 2018 to $2 billion, doubling.

In 2019, fully delegated long funds performed the best, with an average return of 42%. Notably, family offices and high-net-worth individuals became the main investors in these Hedging funds, accounting for 48% and 42% respectively.

The survey shows that there are currently about 150 active encryption hedging funds, with nearly two-thirds (63%) established in 2018 or 2019. The establishment activity of cryptocurrency funds is highly correlated with the price trend of Bitcoin. The surge in Bitcoin prices in 2018 seems to have acted as a catalyst for the establishment of cryptocurrency funds.

The report categorizes cryptocurrency hedge funds into four types: fully discretionary long, fully discretionary long/short, quantitative funds, and multi-strategy funds. Among them, quantitative funds are the most common, accounting for nearly half of the market share. The other three strategies each account for about 17-19% of the market share.

From the perspective of investor composition, family offices and high-net-worth individuals account for almost 90% of all investors. Surprisingly, pension funds, foundations, and endowments have very low participation in cryptocurrency investments. The investment ratio of traditional venture capital funds and funds of funds in this field is also relatively small.

The median number of investors in these encryption hedging funds is 27.5, with an average of 58.5. The median average investment size is $300,000, while the average is $3.1 million. About two-thirds of encryption hedging funds have investment sizes below $500,000.

In 2019, the global assets managed by encryption hedging funds were estimated to exceed $2 billion, a significant increase from $1 billion in 2018. The distribution of asset management size shows a Matthew effect, with a few hedge funds managing a large scale of assets, similar to the pattern in the traditional hedge fund industry.

In 2019, the median performance increase of crypto hedge funds reached 74%, while in 2018, due to a sudden market downturn, the average performance was -46%. By investment strategy classification, fully discretionary long funds performed the best in 2019, with a median performance of 40%, followed by fully discretionary long/short (33%) and quantitative strategies (30%), while multi-strategy funds performed relatively weakly at 15%.

It is worth noting that Bitcoin rose by 92% in 2019, outperforming all encryption hedging funds. The poor performance of these funds may be related to the bear market in 2018, and they also failed to fully capture the market uptrend in 2019.

With the development of the encryption derivatives market, hedge funds have gained more investment tools. Surveys show that 48% of surveyed hedge funds have short positions, and 56% use derivatives. About one-third of the funds are involved in futures and options trading products. In terms of leveraged trading, 56% of crypto hedge funds used leverage in 2020, but the proportion of those who actively used it was only 19%.

In the future, with the increase of regulated encryption futures products, it is expected that more encryption hedging funds will enter this field. However, the prospects for leveraged trading remain unclear, mainly constrained by the increasing difficulty for brokers to obtain debt financing and inherent risks.