PwC: Hedge funds continue to dabble in crypto despite bearish trend

Traditional hedge funds are slowly embracing cryptocurrency investing, and their exposure to digital assets appears to be increasing as the market continues to mature, according to new research from PricewaterhouseCoopers (PwC).

In its fourth 2022 Global Crypto Hedge Fund Report, PwC said that about a third of traditional hedge funds surveyed are already investing in digital assets such as Bitcoin . The most likely to invest are so-called "multi-strategy" hedge funds, followed by macro strategy firms and equity strategy firms.

Of the hedge funds currently investing in crypto, 57% have allocated less than 1% of their total assets under management. Two-thirds of the firms currently investing plan to increase their exposure by the end of 2022.

Respondents cited “regulatory and tax uncertainty” as the biggest barrier to investment. Specifically, hedge funds are concerned about a fragmented global regulatory environment and unclear guidance on how to manage the asset class.

The survey was conducted in the first quarter of 2022, with a total of 89 hedge funds participating.

Hedge funds and other traditional asset managers have been watching developments in the crypto space to assess whether they should start investing in the space. While several hedge funds have launched crypto divisions and started investing in the space, most firms remain on the sidelines. Interestingly, a 2021 survey of 100 global hedge funds showed that fund managers expect to allocate an average of 10.6% of their funds to cryptocurrencies within five years.

While crypto assets have been in a bear market for much of 2022, institutional investors appear to be buying into recent price dips. According to CoinShares data, investment funds focused on Bitcoin saw net inflows of $125.9 million, bringing the total net inflows since the beginning of the year to $506 million.

David Olsson, global head of institutional distribution at BlockFi , once said, “80% of the top 50 global hedge funds we interviewed are embarking on some kind of crypto journey.”

Olsson believes that hedge funds have been preparing to get involved in the crypto space for a long time, given that the field has seen significant increases in liquidity and institutionalization over the years. According to a study conducted by Fidelity last year, 70% of financial institutions surveyed planned to invest in cryptocurrencies within the next year, while 90% said they planned to do so within the next five years.

Olsson said, "Over the past 10 years, Bitcoin has averaged an annual return of more than 100%, while U.S. stocks have returned about 10% a year. Therefore, Bitcoin is too big a part of people's minds to ignore it. Cryptocurrency can fix the plumbing of the global financial system, starting with eliminating high fees from banks."