PwC 2023 Cryptocurrency Hedge Fund Report Traditional Funds Polarized, Cryptocurrency Funds Remain Confident

PwC 2023 Cryptocurrency Hedge Fund Report Traditional Funds Polarized, Cryptocurrency Funds Confident

Tokenization is the biggest opportunity this year, while the market’s enthusiasm for NFTs has greatly cooled down.

This article is from PwC’s “PwC Global Crypto Hedge Fund Report,” compiled by Odaily Planet Daily jk.

Summary

Although the proportion of traditional hedge funds investing in crypto assets has decreased from 37% in 2022 to 29% in 2023, confidence in the value proposition and long-term sustainability of crypto assets seems to remain stable.

According to the 2023 Global Crypto Hedge Fund Report, traditional hedge funds currently investing in crypto assets indicated that they will increase or maintain their investment proportion regardless of weakened confidence in this asset class due to market volatility and regulatory barriers.

The report, compiled by PwC in collaboration with the Alternative Investment Management Association (AIMA) and CoinShares, includes two sets of survey results: one from traditional hedge funds and the other from crypto hedge funds.

The report also found that in the past year, the average allocation of crypto assets managed by traditional hedge funds surveyed increased from 4% to 7%. Meanwhile, 93% of crypto hedge fund respondents expect the market value of crypto assets to be higher by the end of 2023.

When asked about plans to increase investment proportion, over one-third (37%) of traditional hedge funds that do not invest in crypto assets expressed curiosity but are waiting for the assets to mature, an increase from 30% last year. In contrast, 54% of respondents said it is unlikely that they will invest in the next three years, an increase from 41% last year.

John Garvey, Global Financial Services Leader at PwC, commented:

“Despite market volatility, a decline in digital asset prices, and the collapse of some crypto businesses, investment in crypto assets is expected to remain strong in 2023. Traditional hedge funds, committed to the market in the long term, are not only increasing their managed crypto assets but also maintaining or even increasing the amount of capital they invest in the ecosystem. However, regulatory uncertainty and barriers are clearly impacting the investment decisions of many funds. More than half of the respondents indicated that they are likely to invest/increase investments in digital assets once greater transparency, regulatory certainty, and risk management are achieved.”

Regulatory Clarity is Crucial for Investor Participation

Crypto hedge funds that specialize in investing in cryptocurrencies require greater transparency and regulatory requirements to mitigate investor risks and enhance confidence in this asset class, which was proposed after the collapse of some crypto businesses in 2022. These requirements include mandatory asset segregation (proposed by 75% of all surveyed respondents), mandatory financial audits (62%), and independent reserve asset reporting (60%). Liquidity was once considered the main factor in choosing trading platforms but is now seen as equally important as platform security: among the surveyed crypto hedge funds, 21% chose liquidity as the most important consideration, an increase from 10% last year. As a result of the impact of market events in 2022, more than half (53%) of crypto hedge funds reported upgrading their counterparty risk management processes.

For traditional hedge funds that have already invested in crypto assets, they also express concerns about the evolving regulatory environment, especially in the United States. Among them, 23% indicate that this will have a substantial impact on them or lead them to re-evaluate the feasibility of their crypto asset positions. More than half (54%) of traditional hedge funds confirm that they will change their approach and become more interested in this asset class if perceived industry barriers and uncertainties are resolved, an increase from 29% last year. In contrast, crypto hedge funds seem relatively indifferent to these regulatory developments, with only one-third of respondents expecting greater legal and compliance costs, and 12% of respondents believing that the current regulatory environment in the United States may cause them to move to more crypto-friendly jurisdictions.

Market Developments Have an Impact on Investor Participation

Last year’s crypto market events, including the collapse of some crypto asset service providers, were generally viewed as negative by respondents from traditional hedge funds: 57% of funds reported that their prospects were negatively or strongly negatively affected. Among these funds, 70% manage assets exceeding $1 billion.

More than two-thirds (71%) of surveyed traditional hedge funds currently do not invest in crypto assets, an increase from 63% last year. The four main reasons why traditional hedge funds do not invest in crypto assets remain consistent with last year’s responses, including: (1) client reactions or reputational risks, (2) lack of regulatory and tax clarity, (3) insufficient or unreliable third-party data, and (4) beyond the scope of current investment mandates.

In contrast, surveyed crypto hedge funds seem unaffected by recent market fluctuations, with half (50%) reporting no impact. Nearly one-third (27%) hold an optimistic view of the current market, possibly due to the wider investment opportunities brought about by the widespread decline in crypto asset valuations. In light of last year’s events, 53% of crypto hedge funds reported updating their counterparty risk management processes.

Tokens as a Development Method Receive More Attention

Compared to crypto hedge funds, traditional hedge funds show greater curiosity in tokenized assets and securities, with one-fourth of the funds exploring tokenization. In contrast, only 15% of surveyed crypto hedge funds reported exploring investments in tokenized securities. Tokenization of funds promises faster settlement times and lower operational costs, improving efficiency and reducing friction. About one-third (31%) of surveyed traditional hedge funds identified tokenization as the biggest growth opportunity in the crypto asset space in the coming year.

Divergence in Investment Strategies between Traditional Hedge Funds and Crypto Hedge Funds

“Diversified asset portfolios” or “long-term excess returns” are the most common reasons why traditional hedge funds incorporate crypto assets into their portfolios. Over half (54%) of traditional hedge funds currently investing in crypto assets stated that they intend to maintain the same allocation level this year. 46% of the funds indicated plans to increase investments in this asset class by the end of 2023, a decrease from 67% last year.

The majority (91%) of traditional hedge fund investors who have already invested in crypto assets stated that they hold the two largest cryptocurrencies in terms of market value and trading volume, Bitcoin and Ethereum. This percentage increased from 67% last year, indicating a shift towards large-cap coins and a more conservative investment approach.

No respondents reported investing in NFTs, while one-fifth of traditional hedge funds invested in NFTs last year, suggesting a significant cooling of market enthusiasm for NFTs since their peak in 2021.

Among surveyed crypto hedge funds, market-neutral strategies remain the most popular, although the usage rate decreased from 30% to 20% compared to the previous survey. Conversely, the usage rate of discretionary long-only crypto strategies increased from 14% to 19%, while the usage rate of quantitative long-short crypto strategies decreased from 25% to 18%. This evolution may be more related to the current market environment rather than a fundamental shift in long-term trading strategies. All crypto hedge fund strategies, except for market-neutral strategies, experienced losses.

Jack Inglis, CEO of AIMA, said:

“The digital asset space has had to confront flaws in its underlying operations, including risk management and allegations of misconduct. Investor interest in the sector has shown some resilience in certain areas, particularly tokenization, which provides a basis for industry participants to rebuild institutional investor and traditional hedge fund confidence in this asset class.”

Alexandre Schmidt, Index Fund Manager at CoinShares, said:

“Crypto hedge funds have demonstrated remarkable resilience in the complex environment of 2022. Most surveyed funds have generated positive alpha returns, highlighting the significant role these companies play in the digital asset ecosystem. As we navigate through 2023 and beyond, regulatory agencies present a hurdle in the near term, but this will pave a clearer path for long-term investment in digital assets, fostering higher adoption rates from small retail investors to large institutional investors.”

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