While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Hedge funds expect 7% crypto allocation by 2026
The wave of institutional adoption of cryptocurrency assets has been on the rise since the start of 2021. Leading banks and financial institutions have started to offer services in digital assets to the public. Several hedge fund billionaires including Ray Dalio and Stanley Druckenmiller have unveiled their crypto positions.
Although the number of prominent names from the traditional financial space publicly disclosing their Bitcoin investments is still relatively low, the trend could turn very quickly. Broadly speaking, the traditional finance world has gone from disregard to outright hostility to now tentatively embracing cryptocurrencies.
According to a recent survey conducted by global fund administrator Intertrust Group, international hedge funds are planning to significantly increase their crypto exposure over the next five years.
Intertrust’s survey, which involved Chief Financial Officers (CFOs) from roughly 100 hedge funds around the world, concludes that an overwhelming majority (98%) expect their hedge fund to invest in cryptocurrencies within the next five years. The CFOs polled had average assets under management (AUM) of $7.2 billion. This would represent a large increase in appetite among hedge funds.
Senior level hedge fund executives plan to allocate an average of 7.2% of their assets into crypto by 2026. That would equate to around $313 billion, based on alternatives data platform Preqin’s forecast for the future size of the hedge fund industry. While 7.2% is the average allocation, about 17% of the respondents expect to allocate over 10% of their portfolio in crypto. North American hedge funds were the most bullish on crypto, estimating that they would hold an average of 10.6% in crypto asssets by 2026.
“From an investor perspective, CFOs are going to have to really ensure they have those controls in place for investors to be comfortable. If one in six expects to invest more than 10% in crypto, then one in six will need to be prepared for that investment”, Jonathan White, Global Head of Fund Sales at Intertrust Group, commented on the growing interest in crypto investments.
“It comes after a stellar performance from cryptocurrencies such as Bitcoin and Ethereum in the past year and growing interest from institutional and retail investors in digital assets. Hedge funds will need to prepare for this change in their allocation. They will need to think about where the assets are custodied, how they strengthen their operational controls around crypto investments, and how they verify the assets”, the report states.
The Intertrust survey echoes findings from auditing giant PricewaterhouseCoopers (PwC) and Alternative Investment Management Association (AIMA) which reached a similar conclusion in the 3rd Annual Global Crypto Hedge Fund Report released last month.
For purely crypto hedge funds, the report estimates that the total AUM has globally increased to almost US$3.8 billion in 2020, up from US$2 billion in the previous year. “We expect inflows into crypto hedge funds to continue to increase over the coming months as more and more institutional investors decide to allocate to this fast-growing space”, said Henri Arslanian, PwC Crypto Leader.
The bulk of crypto hedge funds trade Bitcoin/BTC (92%) followed by Ethereum/ETH (67%), Litecoin/LTC (34%), Chainlink/LINK (30%), Polkadot/DOT (28%) and Aave/AAVE (27%). About half of crypto hedge funds trade derivatives (56%), but short-selling has drastically reduced, from 48% to 28% in 2020. Crypto hedge funds are also involved in cryptocurrency staking (42%), lending (33%) and borrowing (24%).
Roughly 21% of the traditional hedge funds surveyed are also investing in cryptocurrencies and the average percentage of their total AUM invested is 3%. PwC adds that 57.1% of traditional hedge funds invested in digital assets for general diversification purposes. Only 14% say they are looking for a hedge against inflation. According to the report, 86% of those funds that are already investing in crypto intend to increase their allocation by the end of 2021.
“From the findings in this report, it’s evident that hedge fund allocations to digital assets continue to gain traction. Diversification and exposure to a new value creation ecosystem are cited as key drivers for investing in digital assets,” said Jack Inglis, Chief Executive Officer of AIMA.
Together, these noteworthy findings suggest that the pace of crypto adoption, both in the corporate and financial services industry, is merely in its early stages. According to recent Federal Reserve data analysed by The Carfang Group, US corporations had cash holdings of approximately $3.83 trillion on their balance sheets by the end of 2020. If only 1% of this total ($38.3 billion) were allocated to digital assets, it would mark a nearly 6-fold increase compared to today’s $6.5 billion in corporate Bitcoin holdings.
In many ways, blockchain proved its value so readily that the pace of adoption shouldn’t surprise. Figures corresponding to the upper range of the estimates suggested by the survey respondents reveal that Bitcoin adoption momentum could be faster than even the most conservative estimates model.
