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November 15, 2017  

Bitcoin Rise Ignites Crypto Fund Explosion

An entirely new category of investment vehicle — cryptocurrency funds — has materialized in the past year, largely in response to the meteoric rise in the price of bitcoin and the extraordinary potential of blockchain technology.

But only now is the magnitude of the crypto-fund explosion becoming quantifiable and the make-up of that community coming into focus. Hedge Fund Alert has identified 119 funds dedicated to investing in bitcoin and ether — the most liquid cryptocurrencies — as well as an array of other tokens issued to fund blockchain-related startups. All funds listed have either launched or are proposing to do so in the near future (click here for listing of crypto funds).

This year’s flood of crypto fund launches represents the fastest growth of any hedge fund sector in the industry’s history. However, the total sum held by these startups remains small, with financial-technology research firm Autonomous NEXT estimating in October that they held just $2 billion to $3 billion.

Excluded from the list are another 40 or so outfits that are believed to be entering the cryptocurrency sector, but their existence or plans couldn’t be confirmed. In several of those cases, the fund managers couldn’t be identified. Others missing from the list were cited as possible scams.

Many of the crypto funds are structured as limited partnerships that charge management and performance fees, but that’s where the similarities with traditional hedge funds end. Few crypto funds have more than $5 million or any institutional LPs. And many are run by tech-savvy managers in their twenties with virtually no investment experience in financial markets. Few of those individuals have experienced any sort of market crash during their working lives.

That’s beginning to change, however, as increasing numbers of Wall Street veterans are entering the cryptocurrency-management field (see article on Page 2).

Little has been reported thus far on the performance of startup crypto funds. However, several managers have alluded to three- and four-digit percentage gains, causing bitcoin enthusiasts to disparage the results of traditional hedge funds. The price of bitcoin now stands at roughly $6,500, up more than 800% in the past 12 months.

Not all crypto funds are small and limited to friends and family. Former Fortress Investment principal Michael Novogratz is staffing up to launch a crypto fund early next year with as much as $500 million, which would be far larger than any other fund in the sector. Novogratz is expected to contribute $150 million to the fund and raise the rest from outsiders.

Other crypto-market stalwarts include BlockTower Capital, Pantera Capital and Polychain Capital.

BlockTower, an event-driven fund, is led by former University of Chicago endowment chief Ari Paul and former Goldman Sachs banker Matthew Goetz.

Likewise, Pantera is widely considered one of the largest institutional owners of bitcoin. The firm was founded in 2003 by Dan Morehead, who was previously head of macro trading at Tiger Management. After a Fortress Investment fund suffered losses on its bitcoin holdings in 2014, it transferred those assets to Pantera and took a minority stake in the firm.

Polychain, led by Olaf Carlson-Wee, refers to itself as the largest digital-asset fund in the world. It manages some $350 million of assets and invests largely in initial coin offerings by blockchain-related startups, aiming to get in before the public phases of the offerings.

Pantera and Polychain are based in San Francisco, which has quickly become the U.S. hub for cryptocurrency investment funds.

It’s worth noting that no management firm running a crypto fund has registered with the SEC, meaning that no players in that market are yet required to file public disclosures. But a few have filed a Form D, which the SEC requires for issuers of privately placed securities that don’t need to be registered.

CORRECTION (11/21/17): This article has been revised. As a result of an update to the Crypto Funds list, the number of funds stands at 119, up from 91. Also, the original article indicated that venture capital funds were excluded from the list. The are included in the revised list if they invest in cryptocurrencies.