The global crypto hedge fund industry has undergone significant transformation in recent years, marked by maturation in governance, increased institutional participation, and evolving investment strategies. This comprehensive report synthesizes insights from Q1 2020 survey data collected from the largest crypto hedge funds worldwide, offering a detailed analysis of assets under management (AuM), performance metrics, operational practices, and emerging trends shaping the sector.
Backed by research from Elwood Asset Management and qualitative expertise from PwC’s global crypto team, this report focuses exclusively on actively managed crypto hedge funds—excluding passive index funds and venture capital vehicles. The findings reflect a growing alignment between traditional finance standards and the digital asset ecosystem.
Market Size and Assets Under Management (AuM)
The total assets managed by crypto hedge funds doubled in 2019, rising from $1 billion to over $2 billion. This substantial growth underscores increasing investor confidence and market resilience despite volatile price movements.
Key AuM metrics include:
- Average AuM: Increased from $21.9 million (2018) to **$44.4 million** (2019)
- Median AuM: Rose from $4.3 million to **$8.2 million**
- AuM at launch: Median initial size was $2 million, indicating a 4x average growth per fund during 2019
Notably, the percentage of funds with AuM exceeding $20 million nearly doubled—from 19% in 2018 to 35% in 2019—highlighting a shift toward larger, more scalable operations. A small number of dominant players manage the majority of capital, while a long tail of smaller funds continues to exist.
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Investment Strategies Dominating the Landscape
Crypto hedge funds employ diverse strategies, but one approach stands out:
Quantitative Strategies Lead the Pack
- 48% of funds use quantitative methods
- Followed by discretionary long-only (19%), discretionary long/short (17%), and multi-strategy (17%)
Quantitative funds leverage algorithmic trading, market-making, arbitrage, and low-latency execution models. Their reliance on highly liquid assets like Bitcoin and Ethereum enables rapid trade execution and risk mitigation.
Discretionary long-only funds focus on holding early-stage tokens and established cryptocurrencies for extended periods, often with longer lock-up requirements. Meanwhile, long/short and multi-strategy funds combine directional bets with hedging techniques to navigate market cycles.
Fund Performance: Rebounding from a Bear Market
After a dismal median return of -46% in 2018, crypto hedge funds rebounded strongly in 2019 with a median gain of +30%—though still trailing Bitcoin’s impressive +92% return.
Performance by strategy:
- Discretionary Long Only: +40% median return
- Discretionary Long/Short: +33%
- Quantitative: +30%
- Multi-strategy: +15%
While most strategies outperformed 2018 results, none matched Bitcoin’s explosive rally. This suggests that many funds function more as volatility dampeners than alpha generators during strong bull runs.
Survivorship bias is evident: only funds that survived the harsh 2018–2019 conditions contributed to this year’s data. Underperforming funds likely shut down, skewing aggregate performance upward.
Fee Structures: Stability Amid Rising Costs
Median fees remained unchanged:
- Management fee: 2%
- Performance fee: 20%
However, average fees shifted:
- Average management fee rose from 1.7% to 2.3%
- Average performance fee dropped from 23.5% to 21.1%
This divergence reflects rising operational costs—especially compliance, custody, and technology infrastructure—as funds seek institutional credibility. Smaller funds struggle to break even; a median AuM of $8.2 million generates just **$164,000 annually at a 2% fee**, often insufficient to cover a six-person team.
To compensate, some funds diversify income through market-making, advisory roles, or selling GP stakes.
Core Activities Beyond Trading
Crypto hedge funds are increasingly involved in value-generating activities beyond simple buy-and-hold strategies:
| Activity | % of Funds Involved |
|---|---|
| Staking | 42% |
| Lending | 38% |
| Borrowing | 27% |
These activities exploit blockchain-specific mechanisms such as proof-of-stake rewards and decentralized finance (DeFi) protocols to generate yield. They require technical expertise—especially in node operation, smart contract monitoring, and security protocols—making CTOs integral members of fund teams.
Cryptocurrencies Traded: BTC Dominates
Bitcoin remains central to crypto hedge fund activity:
- 97% trade Bitcoin (BTC)
- 67% trade Ethereum (ETH)
- Other major altcoins: XRP (38%), Litecoin (LTC, 38%), Bitcoin Cash (BCH, 31%), EOS (25%)
Nearly half of all funds report that at least 50% of daily trading volume involves BTC, though only 5% are pure Bitcoin funds.
Litecoin's prominence despite its smaller market cap suggests it offers favorable liquidity or arbitrage opportunities.
Derivatives and Leverage: Expanding Toolkit
The derivatives market has matured significantly:
- 56% use derivatives (futures, options)
- 48% actively short crypto assets
- 38% use cash-settled futures; 31% use physically settled
- 69% permitted to short in their fund documents
Leverage usage is growing:
- 56% allowed to use leverage (up from 36% in 2019)
- But only 19% actively utilize it, due to high collateral demands and counterparty risks
Derivatives enable complex strategies like market-neutral positioning and hedging—bringing crypto hedge funds closer to traditional finance models.
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Team Expertise: Institutional Talent Enters the Space
The professionalization of fund teams is accelerating:
- Average team size: 8.7 people (up from 7.5)
- Median team size: 6
- Cumulative years of investment experience: Jumped from 24 (2018) to 50 (2019)
Additionally:
- Average blockchain/crypto experience: 16 years
- 38% use third-party research (up from 7% in 2019)
This influx of experienced finance and tech professionals signals growing legitimacy and operational sophistication.
Governance & Operational Best Practices
Custody
- 81% use independent custodians (up from 52% in 2018)
- No single custodian dominates—market remains fragmented
- Regulated custodians with SOC reports are preferred for transparency
Fund Administration
- 86% use independent fund administrators
- Independent NAV calculation is now standard for investor trust
Independent Directors
- 43% have at least one independent director (up from 25%)
- Critical for fair decision-making during redemptions or side pockets
Jurisdictions
Top fund domiciles:
- Cayman Islands (42%)
- United States (38%)
- British Virgin Islands (8%)
Top manager locations:
- United States (52%)
- United Kingdom (15%)
- Gibraltar, Switzerland, Hong Kong
Liquidity Terms and Investor Access
Most funds impose capital restrictions:
- 65% have hard or soft locks
- 63% employ redemption gates (fund-level or investor-level)
Redemption terms vary by strategy:
| Strategy | Frequency | Notice | Lock-up |
|---|---|---|---|
| Quantitative | Monthly | 30–60 days | 12 months |
| Discretionary Long Only | Monthly | 30 days | 18 months |
| Long/Short & Multi-strategy | Quarterly | 30–60 days | 12 months |
Gates protect remaining investors from fire sales during mass redemptions, especially important given crypto’s volatility and illiquid assets.
Legal, Regulatory & Tax Considerations
Crypto funds face unique tax challenges:
- Income from staking, mining, lending may be treated as business income
- Hard forks and airdrops can trigger taxable events
- Wash sale and straddle rules may apply depending on asset classification
- Mark-to-market elections depend on whether crypto is deemed securities or commodities
- Tax safe-harbor regimes in jurisdictions like the UK, Singapore, and Hong Kong often exclude utility tokens
Legal structuring must balance investor appeal with regulatory compliance across multiple jurisdictions.
Frequently Asked Questions (FAQ)
What defines a crypto hedge fund?
A crypto hedge fund is an actively managed investment vehicle that trades liquid public cryptocurrencies and related instruments using strategies such as long/short, quantitative trading, or multi-strategy approaches. It excludes passive index funds and venture capital investments.
Why did median fund performance improve so dramatically in 2019?
The jump from -46% (2018) to +30% (2019) reflects both market recovery and survivorship bias—only surviving funds reported data. Poorly performing funds likely shut down, inflating overall averages.
How do crypto hedge funds generate returns beyond trading?
Many engage in staking, lending, yield farming, and market-making. These activities generate passive income streams but require deep technical knowledge and infrastructure.
Are crypto hedge funds becoming more institutional?
Yes. Rising use of independent custodians (81%), administrators (86%), and independent directors (43%) shows increasing adoption of traditional finance standards to attract institutional capital.
What are the main risks for investors?
Key risks include illiquidity, lack of transparency in valuation, counterparty exposure (especially on exchanges), regulatory uncertainty, and operational vulnerabilities related to private key management.
How do fees compare to traditional hedge funds?
Fees are similar—typically "2 and 20"—but smaller AuMs make cost recovery difficult. Some funds raise additional capital via GP stake sales or diversified revenue streams.
Final Thoughts: The Path Toward Institutionalization
The 2020 data reveals a clear trend: the crypto hedge fund industry is maturing rapidly. With improved governance, professional teams, third-party oversight, and diversified strategies, these funds are increasingly positioned to attract institutional investors.
Yet challenges remain—scalability, sustainable fee models, tax clarity, and consistent performance. As the ecosystem evolves, only those funds that combine financial acumen with technological depth will thrive.
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