All you need to know about Cryptocurrency Hedge Funds – how they work, how to get in & the regulatory angle

The beauty of hedge funds is that they can invest practically in everything. Hardly anything is off-limits from traditional asset classes like equity, fixed income, commodity, and currency to derivatives and different forms of leverage. With the massive returns generated in cryptocurrencies, it was only a question of time that they would explore this field to generate the profits they need to keep their investors happy. Catering to accredited investors or institutional investors it automatically is not constrained by stricter rules that apply to other players in financial markets, as they do not warrant the same protection as retail clients and as such allow hedge funds to operate riskier strategies. It’s a match made in heaven, you could say. The Cryptocurrency sector, largely unregulated, offering opportunities like no other asset class at the moment is the perfect playing field for return-hungry, risk-embracing hedge fund managers and Autonomous NEXT, the research firm, counts 75 at the time of writing.

How they work

How do Cryptocurrency Hedge Funds work then? Some of them simply do what they do in other asset classes such as FX as well, i.e. they buy and sell a cryptocurrency like Bitcoin based on their own models and seek to make a profit from the trading activity. They either invest exclusively in cryptocurrencies or they just add it as an additional asset class to their existing range.

Others act more like venture capital funds by investing in Pre-ICO. Just as a reminder, Pre-ICO is the period where selected investors may buy tokens prior to the official crowdsale, often with a substantial discount. Naturally, access is sometimes difficult to obtain and requires a good understanding of an opportunity both for finding it, but also evaluating whether it is worth investing. In the same direction go investments in companies running an ICO where the hedge funds take an actual equity stake.

Slightly different and technically not a separate business model are those hedge funds that actually use the ICO model to raise funds to invest them in turn in cryptocurrencies in one of the ways described above.

Where is the money?

Unlike in traditional hedge funds, the investor base is tilted towards wealthy individuals. Polychain Capital, the blockchain asset hedge fund that manages $250m, is one of the few exceptions that attract institutional investors as it is backed by VC big weights Sequoia Capital, Founders Fund, Union Square Ventures and Andreessen Horowitz.

How to get in

Getting in is easier said than done though. As the term accredited investor or high-net worth individual indicates, it requires a lot of dosh. In order to be considered an accredited investor in the USA, for instance an individual – as per the SEC Rule 501 of Regulation D – has a net worth that exceeds $1 million at the time of the purchase, or has assets under management of $1 million or above, or an income exceeding $200,000 in each of the two most recent years (to understand the threshold for your joint patrimony with your wife, check the rules). Not exactly peanuts for most mortals and while hedge funds – crypto or not – seldom talk about their financials, but should be in a similar range. Cryptocurrency Fund LP, for example, requires $100k as a minimum investment, Metastable even asks for at least one million US dollars to start with, Crypto Asset Fund, too, generally requires you to put down a hundred grand to invest, but also offers a feeder fund for non-US investors, which starts at $25,000 and managed portfolios for everyone willing to invest $50,000.

An interesting one is Bitwise Asset Management, which seeks to provide an easier way to access crypto markets. Its HOLD 10 Index, which is a basket of the largest coins, requires a $10,000 minimum investment. While currently investors must be accredited and US-based, it aims to offer its services also to other investors, for example, in the form of ETFs or mutual funds.

Regulatory considerations

What is the regulatory angle though? Well, generally said it’s the same regulation as for all hedge funds, which is determined by the fund’s jurisdiction of origin and where it operates. In other terms, investments in cryptocurrency hedge funds are risk, probably even more than in traditional hedge funds given the nature of the underlying asset.

Another aspect applies for those that use the ICO structure to fund their investments. These are obviously subject to the respective rules, which differ significantly from jurisdiction to jurisdiction and are currently under much scrutiny from regulators around the globe. While investor protection in that context is likely to increase in the future, it still is unlikely that any losses would be compensated for, so make sure you know what you get into before you invest your hard earned money.

Disclaimer: Please note that this article like all our articles should not be taken as, and is not intended to provide, investment advice. You should always conduct your own thorough research before investing in any cryptocurrency or related financial instruments.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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