Hedge funds are betting big on crypto

When hedge funds invest in an asset class, it’s usually a good sign that there’s money to be made. A new report on the Wall Street Journal highlights that some of the largest funds are now convinced enough that they are betting big.

The WSJ notes that firms such as Brevan Howard, Hudson Bay Capital Management, and Tudor Investment Corp, are investing millions in Bitcoin, Ethereum, and other blockchain-based assets. For some, it’s about protecting against rising inflation. For others, it has become a legitimate “fifth asset class,” sitting alongside stocks, bonds, currencies, and commodities.

“It’s big enough now,” Robert Bogucki, co-head of global trading at Galaxy Digital Holdings, was quoted in the report as saying. Galaxy itself is an early crypto investor and now seems at the forefront of a new wave in Wall Street, managing US$3 billion in assets.

Despite the interest in crypto, Wall Street investors are avoiding one risk-filled investment strategy with the asset class that they love taking with others: investors are very hesitant to attempt to short crypto. As even the layperson knows now, thanks to the GFC and subsequent films and analysis of what led to it, shorting can cripple a hedge fund with debt if the asset should accumulate in value. Crypto’s reputation for volatility, and a very quick appreciation in value at times has meant that very few hedge funds would want to risk the value of an asset suddenly jumping.

Instead, the investment strategy behind crypto seems to be focused on simply buying tokens and trading futures, rather than playing options markets, the report notes.

And, as Michael Botlo, who ran quantitative-trading fund Quantbot and is now working on crypto initiatives, notes in the report, the crypto pool is large and liquid enough that the investors into hedge funds are demanding that firms get involved, as it is an asset that is easily tradable.

Despite this interest from a large cross-section of Wall Street, it is worth noting that other investors remain sceptical. As an investment option, they have traditionally been poor at storing value or acting as a means of diversification within portfolios. The problem here is that, as volatile as they are, crypto assets do take the same cues as traditional markets, so they can’t operate as a mitigating factor against losses in other parts of the portfolio.

Still, with crypto still being so new (especially at the high-end institutional end of town), the opportunity for new players or shifts in the market is huge. There is an early mover advantage here for the right investors, and that could prove enormously lucrative.