Crypto Hedge Fund
The great thing about hedge funds is that they can put their money into almost anything. Almost nothing is off-limits, including traditional asset classes like stocks, bonds, commodities, and currencies, as well as derivatives and other forms of leverage.
With the huge profits that can be made in cryptocurrencies, it was only a matter of time before they looked into this area to make the money they needed to make their investors happy.
Serving only accredited investors or institutional investors, hedge funds don’t have to follow the stricter rules that apply to other players in the financial markets. This is because institutional or accredited investors don’t need the same level of protection as retail clients, so hedge funds can use riskier strategies.
You could say it’s a match made in heaven. The cryptocurrency market is mostly unregulated and has opportunities like no other asset class. This makes it a great place for hedge fund managers who want to make money and are willing to take risks. At the time of writing, Autonomous NEXT counts 75 of these managers.
How do crypto hedge funds work?
Then, how do crypto hedge funds work? Some of them just buy and sell cryptocurrencies like Bitcoin based on their models, just like they do with other asset classes like FX. This is how they try to make money from trading. They either only invest in cryptocurrencies or add them to the other types of assets they already have.
By putting money into Pre-ICO, others act more like venture capital funds. Just to remind you, Pre-ICO is the time before the official crowdsale when certain investors can buy tokens, often at a big discount.
Access is sometimes hard to get, and you need to know a lot about an opportunity to both find it and decide if it’s worth your time and money. In the same way, investments in companies that are running an ICO and giving hedge funds a real stake in the company go in the same direction.
Slightly different, but not technically a separate business model, are hedge funds that use the ICO model to raise money to invest in cryptocurrencies in one of the ways described above.
Where are the dollars?
The investors are mostly wealthy people, which is different from traditional hedge funds. Polychain Capital, a $250 million blockchain asset hedge fund managed by Sequoia Capital, Founders Fund, Union Square Ventures, and Andreessen Horowitz, is one of the few exceptions that attract institutional investors.
How to get into crypto hedge funds
But getting in isn’t as easy as it sounds. As the words “accredited investor” and “high-net-worth individual” suggest, you need to have a lot of money.
To be considered an accredited investor in the United States, a person must have a net worth of more than $1 million at the time of the purchase, have $1 million or more in assets under management, or have made more than $200,000 in each of the last two years. This is according to SEC Rule 501 of Regulation D. (to understand the threshold for your joint patrimony with your wife, check the rules).
Not exactly peanuts for most people, and hedge funds, crypto or otherwise, rarely talk about their finances, but they should be in the same range.
Cryptocurrency Fund LP, for example, wants you to invest at least $100,000, and Metastable wants you to start with at least USD 1,000,000. Crypto Asset Fund also wants you to invest at least $100,000, but they also have a feeder fund for non-US investors that starts at $25,000 and managed portfolios for anyone willing to invest $50,000.
Bitwise Asset Management is an interesting one because it wants to make it easier for people to get into crypto markets. It needs at least $10,000 to buy into its HOLD 10 Index, which is a basket of the largest coins.
At the moment, investors must be accredited and live in the US, but it plans to offer its services to other investors as well, such as through ETFs or mutual funds.
Regulatory things to think about
But what does regulation have to do with it? Well, in general, it’s the same rules that apply to all hedge funds. The rules depend on where the fund is based and where it operates. In other words, investing in cryptocurrency hedge funds is risky, probably even more so than investing in traditional hedge funds, because of the nature of the underlying asset.
People who use the ICO structure to fund their investments need to think about something else. These are, of course, subject to their own rules, which vary a lot from place to place and are currently being closely looked at by regulators all over the world.
Even though investor protection in that area is likely to get better in the future, it’s still unlikely that any losses would be made up for, so make sure you know what you’re getting into before you invest your hard-earned money.