C-C #68: Bear Market for Crypto Funds

December 16, 2019
Mattison Asher

BTC up, crypto funds down

While BTC is up almost 88% YTD, Crypto funds are assuredly in a bear market. Interest in crypto funds has generally dried up. Almost 70 crypto funds have closed this year, while the number of new funds launching has halved in 2019 compared to 2018.

One of the key reasons that funds have been closing is troublesome performance, especially compared to the industry benchmark of BTC. As of the end of Q3, the crypto funds tracked by Vision Hill Advisors had been generating lackluster returns. The returns of the composite of funds Vision Hill tracks was -22.2% for Q3, bringing the YTD returns for the composite to 29.9%. Since the market has continued to sour since the release of the report, I expect that these numbers have gotten even worse. The Eurekahedge Crypto-Currency Hedge Fund index tells a similar story; YTD returns as of the end of November are now only 24.8%.

Vision Hill Tracked Fund Returns:

 

Allocators are not currently interested in crypto funds

As someone who speaks to allocators based mostly in the West, my perspective is that sentiment has soured from ignorance to apathy. Institutions such as pension funds and endowments did not allocate to crypto funds significantly in 2019, disproving the “institutions are coming” thesis that so many trading professionals had, including myself. Funds such as Multicoin Capital have been trying to tap into the Asian allocator markets to fight this trend, while funds such as Ikigai have stopped actively trying to market for the time being. Additionally, some of the most recognized funds are trying to raise GP (General Partnership) investments, as they do not have a large enough AUM to maintain business operations purely from management fees. GP investors are owners in the actual business entity itself, and thus have claim to the management fees that funds charge.

Furthermore, many of the middle management and entry level employees of the leading digital asset hedge funds have privately talked to me about jumping ship, as they are not confidant that their employers will survive this crypto fund bear market. The general sentiment from both allocators and employees is that the current funds offer no “edge” that will generate sustainable alpha over time. If the digital asset market does not pick up in a significant way, I expect more crypto funds, even many of the most recognized brands, will shut down in 2020.

How crypto funds are adapting

Image result for coinmetrics

Needing a drastic change, many funds have been shifting into on-chain analytics, believing that they will be able to find an edge in these data sets. While I have been able to successfully back test strategies based off on-chain data, I would by no means say that these data sets are the silver bullet most fund managers are seeking. Nearly every fund I speak with states they are partnering with the same data providers who offer on-chain data sets (i.e. Coin Metrics and Digital Asset Data). Since these funds are using the same data providers, the alpha will decrease as these data sets are utilized by more and more funds. Furthermore, there is not enough on-chain data for most time frames to display the level of statistical robustness that is usually needed to support strategies. Traditional quantitative funds would be aghast at the sparse amount of data crypto funds are willing to use to construct systematic strategies. At max, there is approximately ten years of on-chain data for Bitcoin, while less than five years of on-chain data in the optimal scenario can be generated for most other coins.

Takeaways:

1. Almost 70 crypto funds have closed this year

2. Both performance and growth in AUM has been lackluster

3. Crypto funds see on-chain analytics as the silver bullet that will solve all of their problems

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