More Hedge Funds Are Investing in Crypto Assets, but There Is Still Reluctance

A majority of hedge fund executives who didn’t invest in crypto funds cited regulatory uncertainty as their reason, according to a PwC survey.

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Investing in cryptocurrencies is gaining more acceptance among traditional hedge funds, but many pools are taking small positions in the asset class, according to a survey from PwC. 

This year, 38% are investing in crypto assets, up from 21% a year ago, PwC said.

While there is more interest, many traditional hedge funds are still just “dipping their toes” into the sector, according to “PwC’s 4th Annual Global Crypto Hedge Fund Report 2022.

More than half, or 57%, of those surveyed, had less than 1% of total assets under management, or AUM, in digital assets, the report said.

Only 5% of funds had between 20% to 50% of hedge fund AUM in digital assets, PwC said. 

“The ecosystem is maturing, just like it has in other asset classes in the past,” said John Garvey, global financial services leader at PwC.

CoinShares , a digital asset management group, interviewed 77 specialist crypto hedge fund managers, while Alternative Investment Management Association, which represents the alternative investment industry, questioned 89 hedge funds during the first quarter of this year for the PwC survey.

More than half, or 57%, of hedge funds that responded had more than $1 billion of AUM. 

Hedge funds have gotten more educated about crypto investments, Garvey said.

But there still is reluctance.

A large majority, or 83%, of hedge fund executives who didn’t invest in crypto funds cited regulatory uncertainty as their reason for not investing, according to the PwC survey.

That is changing, Garvey said. One factor that made executives hesitant is that some auditors weren’t comfortable with valuing crypto assets.

“People are getting educated. The tools that people are using, the risk management, it’s all maturing,” Garvey said. 

The number of traditional hedge funds not investing in crypto assets dropped to 62% of respondents, down from 79% a year ago, PwC said. About one-third, or 29%, of hedge fund managers that aren’t yet investing in digital assets said they are in late-stage planning to invest or looking to invest. 

The number of hedge funds focused on crypto has potentially grown to more than 300 globally, with half launched in the past three years, PwC said.

The 300 funds are a small piece of the overall hedge fund market. Globally, there were 8,259 funds in the first quarter, according to industry tracker HFR

The AUM of crypto hedge funds also remains tiny, increasing by 8% to about $4.1 billion in 2021.

This compares to the AUM of hedge funds globally, which totaled about $4 trillion in Q1, HFR said.

“[Crypto funds are] a very nascent market and that’s why AUM is still pretty modest per fund,” Garvey said.  

The PwC study was conducted in April, before the cryptocurrency crash of May that wiped out more than $600 billion in market capitalization in one week. The crash saw the de-pegging of TerraUSD (UST), which resulted in the collapse of Luna. Many other cryptocurrencies also lost significant value. 

“There has not been panic in the market even with the Luna-Terra crash,” Garvey said. 

Corrections impact everyone but the market has recovered before, and Garvey said there is no reason to believe it won’t rebound again.

He referred to the “Crypto Winter” of 2018 when Bitcoin prices tanked about 80%. Crypto prices remained low for the next few years before soaring in 2021. Bitcoin hit an all-time high of more than $68,000 last November.

“The market has had setbacks before and it rebounded in a quite robust way,” Garvey said. 

Write to Luisa Beltran at luisa.beltran@dowjones.com