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April 18, 2018  

Hedge Funds Remain Cautious About Crypto

Even as new fund managers continue to pour into the cryptocurrency field amid ongoing hype about digital assets, only a small handful of established hedge fund firms show any interest in the emerging asset class.

Consider that among the 2,638 hedge fund managers registered with the SEC, only seven said they were running client capital in crypto-asset portfolios as of the first quarter, according to the latest Form ADV filings with the SEC. One of those — Polychain Capital — is a relatively new business formed specifically to invest in digital assets. The only established hedge fund shops managing crypto funds were Acuta Capital, Falcon Edge Capital, Passport Capital, Porcupine and TOBAM Core Investments. In addition, JD Capital is investing in crypto assets as part of a volatility strategy.

A handful of other fund operators said in their ADV brochures that they may invest client capital in crypto assets. They include global-macro shop Autonomy

Capital; event-driven manager Hunting Hill Global; Bill Miller’s Miller Value Partners; alternative-investment firm Q Investments; and long/short equity shop Zweig-DiMenna Associates. Several others, including Boothbay Fund Management and Satori Capital, said they may invest in crypto assets through other fund managers.

Among a bumper crop of crypto funds that have launched in the past 18 months, only one fund manager — the $1 billion Polychain — had raised enough capital to require registration with the SEC by March 31. However, several others with assets near the $150 million threshold, including Pantera Capital, are expected to register by the end of June.

A list of crypto-fund operators maintained by Hedge Fund Alert runs to 136 firms, with more being added every month. All but a few of them formed in the past year or two as the prices of bitcoin and other cryptocurrencies skyrocketed, before falling sharply in the last three months. For the most part, established hedge fund managers remain skeptical about the long-term value of cryptocurrencies and concerned about market stability.

Two of the six established fund managers that lately have entered the cryptocurrency market — Falcon Edge and Passport — had been struggling to retain clients amid disappointing performance for their core strategies. A wave of redemptions in 2016 reduced assets under management for New York-based Falcon Edge to $1.3 billion, from $2.9 billion at yearend 2015. Passport, led by legendary stock-picker John Burbank, has seen its asset base shrink to $535 million, on a gross basis, from more than $4 billion a year earlier.

Among the roughly 15,300 SEC-registered investment advisors with brochures on file, including managers of mutual funds and private equity vehicles, only 39 said they are advising clients on crypto investments — including eight newly established firms.

But Matt Stover, founder of hedge fund administrator MG Stover, said he’s been fielding inquiries from larger, more established asset managers — primarily hedge fund firms — that plan to launch cryptocurrency funds. His firm currently handles administration duties for 60 crypto funds.

“There’s a lot of firms that have draft offering documents and are talking to investors,” Stover said. “I would think that at the end of 2018, there will be a lot more names that you would recognize that are running a crypto fund.”

Under SEC rules, fund operators are required to spell out their investment strategies in their ADV brochures. But the rules don’t specify how detailed the disclosures must be — for example, whether a firm must list every type of financial instrument it trades. For that reason, it’s possible a small number of managers are investing in cryptocurrencies without disclosing that they are doing so. Some firms are believed to be investing only partner money in crypto assets, which doesn’t require public disclosure.

One fund operator, R.G. Niederhoffer Capital, excluded a cryptocurrency fund it runs from its ADV filing on the grounds that it mainly trades bitcoin futures, and therefore isn’t subject to SEC oversight.