PwC: Crypto hedge funds’ growing demand for DeFi

A new report from PricewaterhouseCoopers (PwC) and the Alternative Investment Management Association (AIMA) shows that cryptocurrency hedge funds managed nearly $3.8 billion in 2020, up from $2 billion in 2019 and showing a growing demand for DeFi.

The third annual Global Crypto Hedge Fund Report, released on Monday, shows that 31% of crypto hedge funds use decentralized exchanges, with Uniswap being the most widely used (16%), 1inch (8%), and SushiSwap (4%).

At the same time, demand for DeFi tokens in specific segments is also rising: 30% of hedge funds have invested in LINK, the token of oracle service Chainlink, 28% of hedge funds have invested in DOT, the interoperability protocol Polkadot, and 27% of hedge funds have invested in AAVE, the lending platform.

The DeFi space has seen explosive growth in recent months, with the total locked value of Ethereum-based DeFi platforms now reaching $60 billion, according to DeFi Pulse.

At the same time, there are reports that some large traditional hedge funds, such as Steven Cohen’s Point72, are also interested in DeFi and are willing to use it as part of their strategy to establish cryptocurrency funds.

While Bitcoin remains the most popular asset in the fund, 67% of investments also include ETH.

Crypto hedge funds are also involved in cryptocurrency staking (42%), lending (33%), and borrowing (24%).

Some more traditional financial institutions have also seen an increase in interest in DeFi, the head of PwC’s cryptocurrency practice said in an email, writing: “While they are still a long way from using decentralized applications, many financial institutions are working to improve their education and try to understand the potential impact DeFi could have on the future of financial services.”

In 2020, the average return of cryptocurrency hedge funds was 128% (compared to 30% in 2019). The vast majority of investors in these funds are either high-net-worth individuals (54%) or family offices (30%). In 2020, the percentage of cryptocurrency hedge funds with AUM of more than $20 million increased from 35% to 46%.

Meanwhile, the report said 47% of traditional hedge fund managers (with $180 billion in assets under management) have invested or are considering investing in cryptocurrencies.

“The fact that we worked with AIMA and included traditional hedge funds in this year’s report shows that cryptocurrencies are quickly becoming mainstream among institutional investors. This would have been unthinkable 12 months ago,” said PwC’s head of cryptocurrencies.