Digital Currency Revolution Series: Spotlight on PwC & Elwood’s ‘Crypto Hedge Fund Report 2019’

One of the big four auditing and consulting firms, ‘PwC’ in association with ‘Elwood’ has released a report on “2019 Crypto Hedge Fund Report.” Elwood is an investment firm established in 2018 which specializes in digital assets. 

We have seen the UK regulator the Financial Conduct Authority (FCA) has recently given the approval to the companies’ like ‘Prime Factor Capital’ to operate as a full-fledge alternative investment fund manager (AIFM). Prime factor Capital is headquartered in London, the crypto asset management firm is the first to be approved as a crypto-focused hedge fund by the United Kingdom’s market watchdog. 

Elsewhere, as per a regulatory filing, the San Francisco-based crypto hedge fund has been the pioneer crypto fund with more than $1 billion in assets under management (AUM).

Well, amid considerable developments in the hedge fund business, the descriptive report released jointly by PwC and Elwood demonstrates the institutional appetite for cryptocurrency investment continued to increase in 2018, the global crypto hedge fund landscape even as the median return for these crypto hedge funds dropped to -46 percent and offers insights into quantitative elements such as liquidity terms and performance.

These crypto hedge funds were able to double their Assets under Management (AuM) in 2018, with the median crypto hedge fund AuM growing from $2.1 million in January 2018 to $4.3 million at the end of the Q1 of 2019, according to the report.

We quickly run you through the important take-aways of this report:

Size of the Market and AuM: 

• We estimate that there are 150 active crypto hedge funds collectively managing US$1bn AuM (excluding crypto index funds and crypto venture capital funds)
• Over 60% of these funds have less than US$10m in AuM with fewer than 10% managing over US$50m 
• The average crypto hedge fund AuM as of Q1 2019 is US$21.9 million 
• The median AuM of funds as of Q1 2019 (US$4.3m) is 3X that of the median AuM at fund launch (US$1.2m - January 2018), which indicates that funds have been relatively successful at fundraising despite difficult market conditions. 

Fund Strategy and Location: 

• 36% of funds surveyed use or can use leverage and 74% can take short positions 
• Of the funds surveyed, 44% pursue discretionary strategies, 37% quant and 19% fundamental 
• Funds tend to be domiciled in the same jurisdictions as traditional hedge funds, with the top three jurisdictions for the fund entity being the Cayman Islands (55%), the United States (17%) and the British Virgin Islands (BVI) (13%) 
• The majority of crypto hedge fund managers tend to be based in the United States (64%).

Experience and Governance: 

• 52% of funds use an independent custodian, yet only 25% have independent directors on their board 
• The average size of fund team is 7-8 people 
• Typical crypto fund investment professionals have between 3-4 years of investment management experience.

Performance and Fees: 

• The median fund returned -46% in 2018 vs a Bitcoin benchmark of -72%
• In 2018, the median fundamental fund returned -53%, discretionary fund -63% and quant fund +8% 
• The average fees for crypto hedge funds are 1.72% management fee and 23.5% performance fee.