Hedge funds are investing in Bitcoin, but three reasons are a hindrance

The price of Bitcoin has risen by nearly 180% this year, compared to the average return of major hedge funds of only 3.5%. Currently, most hedge fund managers stay away from Bitcoin, and those who have participated in digital currency investment have performed significantly better than their peers this year.

This year, the average hedge fund has gained just 3.5%.

Hedge funds are investment funds whose clients are usually institutional investors. Hedge funds are less regulated than mutual funds because they are not subject to strict rules designed to protect investors. Some of them are not even required to register with financial regulators or file public reports.

Hedge funds can effectively invest in anything, including land, real estate and currencies, and their purpose is to seek to maximize returns for investors while minimizing risk.

The Global Hedge Fund Return Index (HFRX) shows the overall returns of the hedge fund industry, representing all hedge fund strategies. Hedge Fund Research (HFR), which provides indices of more than 150 hedge funds, is the industry's leading provider of hedge fund index data. According to data provided by HFR, the HFRI Weighted Composite Index returned only 0.46% in May and only 3.5% year-to-date. In comparison, the S&P 500 returned 1.16% in May and 9.61% year-to-date.

Some hedge funds are quietly investing in digital currencies like Bitcoin

HFR data shows that most hedge fund strategies have performed poorly in May and year-to-date. The index provider noted that “Technology” and “Currency” were the only strategies that performed well in both periods, adding:

“Exchange funds are doing well because these funds have exposure to digital currencies such as Bitcoin.”

However, these hedge funds that have invested in digital currencies such as Bitcoin do not currently hold large positions. The best performing hedge fund index in May was the HFRI Macro Currency Index, which had an overall return of 3.49% in May and 8.22% so far this year.

“In addition to contributions from the euro, Swiss franc, New Zealand dollar, and Korean won, there is also a strong contribution from the currency index from digital currencies,” HFR said.

Why are hedge funds so cautious about investing in Bitcoin?

“A lot of hedge funds are still very reluctant to get involved in the asset class,” a 16-year hedge fund professional recently told CNBC:

“Honestly, I don’t know enough about digital currencies.”

As for why hedge funds are reluctant to invest in digital currencies such as Bitcoin, Louis Gargour, founder of asset management fund LNG Capital, told reporters:

“It comes down to concerns about volatility, security and perception.”

He listed three issues. First, "Bitcoin's extreme volatility doesn't fit with the risk-adjustment work that fund managers do," Second, fund managers worry about digital currencies being hacked or stolen. Finally, "there's a perception that Bitcoin is still profitable and retail investors aren't yet willing enough to consider reputable institutions," he explained.

However, more hedge fund managers may follow their peers and start investing in digital currencies as digital currencies such as Bitcoin continue to outperform other asset classes. At press time, Bitcoin’s price has risen 70% in May and is up more than 180% year-to-date.