Digital assets have been consolidating their space as an important element not only in individual portfolios, but also in hedge fund portfolios around the world in recent years.

Its incorporation into the sophisticated, interconnected and dynamic financial system has contributed to a valuable development of incentives for the maturation of digital assets and their operating environments, thus contributing to continuous and long-term evolution.

Let's talk about how hedge funds focused on crypto-assets place themselves in the market in 2022, according to the global survey carried out by PwC, which are the trend strengths of this product that has been gaining space in the market and which points of attention have been placed on the market. proof with the troubled scenario presented this year.

THE STRUCTURE OF INVESTOR INTEREST IN CRYPTO ASSETS

That the growth of the crypto-asset ecosystem has increasingly attracted the attention of investors is no secret. Research developed by Sherlock Communications revealed that, in Latin America, Brazil is the leading country in the adoption trend of the use of cryptoassets until the end of the year, with an estimated projection of 36 million Brazilians adhering to digital assets - either as an investment or a means of payment.

Before mostly represented by Bitcoin, today the crypto-assets ecosystem has a wide range of tokens and projects that involve not only financial purpose and decentralization of access to financial resources, but also focused on building communities; promotion of meta-real experiences and incentives to promote ESG issues.

Today, crypto-assets are seen as an avant-garde technological revolution that, with the regulatory advance of the sector in different parts of the world, is gaining more and more space as a component element of portfolios in hedge funds.

The percentage of cryptocurrency-only hedge funds with AUM (assets under management) above $20 million has increased by 13% in the last year. As signaled by the 4th Annual Global Crypto-Hedge Funds Report (2022), there are currently around 163 hedge funds focused exclusively on crypto assets, totaling over $4 billion in custody.

THE INCREASE OF HEDGE FUNDS FOCUSED ON CRYPTO ASSETS IN LAST 10 YEARS

This movement of increasing the number of hedge funds focused on digital assets did not start, however, in this one-year interval. With the advent of Bitcoin’s creation and value gain over the years, the exponent asset of the crypto market has not only gained gigantic monetary proportions, but has also paved the way for the traditional financial industry’s attention to the entire cryptocurrency ecosystem.

As a result, portrayed by the graph above, the increase in hedge funds focused on digital assets took place with greater force from 2017 onwards - with a historic peak in 2018, the year of widespread euphoria in relation to BTC.

WHICH SECTORS DO HEDGE FUNDS INVEST IN

With the maturation of the ecosystem, of the more than 20,000 thousand tokens available, some cryptocurrency sectors are the Golden Gems in the eyes of institutional investors.

In this year's report, PwC shows the strengthening of a multifaceted set of sectors preferred by managers.

As shown in the graph presented, larger value-added assets are preferred at large margins.

WHAT ABOUT STABLECOINS?

In addition to altcoins, stablecoins are also widely adopted by fund managers. The main stablecoins in terms of usage were USD Coin (USDC) and Tether (USDT), with 73% and 69% of funds using them in their portfolios, respectively.

More recent stablecoins, such as TerraUSD (UST), also appeared as the most used, although to a lesser extent and with issues to be raised later. It is interesting to note how the market still offers complex risks, to which everyone is subject.

With the growth of the DeFi platform segment in recent years, 41.6% of crypto hedge fund managers reported to the Annual Global Crypto Hedge Fund Report using decentralized exchanges in 2022, compared to 31.5% last year.

The most used DEX were Uniswap and 1inch.

EVOLUTION IN CRYPTO HEDGE FUNDS PORTFOLIO BUILDING

Certainly, among the segments, there are tokens in which each manager bets more. However, cases like LUNA – a token that collapsed in March along with the stablecoin UST – are a strong reminder that many of the cryptocurrencies are still in development and their projects are still experimental in nature.

Thus, it is necessary for managers and institutional investors to carefully and actively structure and monitor not only strategies, but the construction of their portfolios, as the value of these assets can increase and also shrink, collapsing in a short space of time.

Over the past few years, it has become clear that this evolution movement has been taking place, with a considerable change in the list of most invested altcoins from 2020 to 2021. Thus, a trend towards greater diversification, sophistication in the structuring of operations and assertiveness in the assembling portfolios.

CRYPTO-HEDGE FUNDS AND MAIN MANAGEMENT STRATEGIES

Hedge Funds are known for aiming to seek the highest possible profitability while protecting the portfolio from possible financial losses, especially in bear market scenarios.

Compared to other financial products, they tend to be more profitable, as they employ strategies to maximize returns. But what strategies are these?

The most commonly used strategies in crypto hedge funds are the strategies known as Market Neutral (30%), Quantitative (25%) and Discretionary Management (27% cumulative).

The structured mechanism most used by these funds are derivatives (strategy, with adoption growth from 56% to 69% in 2022).

In regulatory terms, the evolution of the framework on digital assets built around the globe has also been significant in recent years.

With the increase in regulation regarding assets, exchanges and the like, the strengthening of the institutional investor's security and, consequently, of the individual investor also grows; facilitating and even encouraging the evolution and expansion of this product's ecosystem.

The Cayman Islands remains the top location for legal domicile, while the British Virgin Islands has overtaken the United States as the second most popular location. Among the selection criteria, the friendly environment for cryptocurrencies, the possibility of consistent and facilitated regulation proved to be the main considerations when establishing a fund legally.

Many governments still adopt and reinforce regulatory approaches that are quite hostile or indifferent towards cryptocurrencies, pushing away hedge funds, which tend to prefer to operate in territories with a minimum acceptable level of regulatory consistency on the subject.

In a context of maturation in recent years, following the general movement of the crypto ecosystem, the hedge fund industry focused on digital assets has been reaping good results.

With a more structured regulatory framework, consolidation of projects and more experienced managers; hedge funds have been facing positive numbers in 2022, but the challenging macroeconomic scenario of recent months has penalized their performance.

Crypto assets are already considered essential elements in investment portfolios as diversification alternatives. Funds composed exclusively of such assets need, more than ever, to actively explore sophisticated and innovative strategies to manage the diverse risks involved in this class of investment, now potentiated by the challenges of an economic context that generates uncertainty and feeds FUD in the investor.

Managers have been working brilliantly around the world in recent years to strengthen and ensure the evolution of these types of products for the future of the convergence of traditional and disruptive finance with the web 3. Now, more than ever, management will be required of them. even more active, with continuous improvements in the prediction, selection and monitoring of elements of what will be a good portfolio.

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