Hedge funds invested in cryptocurrencies had an average return of 1,522% this year, compared to an average of 7.2% for hedge funds invested in traditional assets.
"Investor interest in funds offering exposure to blockchain technologies and cryptocurrencies has surged in recent months as these innovations continue to move towards the mainstream and generate compelling opportunities for investors, portfolio managers, traders and other market participants," said Kenneth J. Heinz, president of HFR.
The #HFRI FWC Index®, which includes hedge fund strategies across all regions, has produced a +7.2%return YTD through Oct. #HFR
"While the recent performance has been exciting, trading and investing in these evolving areas requires specialized expertise and involves substantial volatility and risks, both real and structural," he added.
Given the hedge funds’ growing interest in the digital currency, HFR has unveiled two new indexes to track the performance of cryptocurrency and blockchain-focused funds. The HFR Blockchain Composite Index and the HFR Cryptocurrency Index are the first family of indices designed to capture performance of hedge funds investing in this rapidly evolving space, HFR said.
According to Heinz, despite the “substantial volatility and risks” involved in Bitcoin-investing, “it is likely that the evolving fundamental disintermediation of traditional payment processing associated with blockchain and cryptocurrencies will continue to grow in an absolute sense and as a component of hedge fund exposures."
The HFR note to investors points out that in 2017, cryptocurrency markets and trading platforms have come up with better liquidity and stability, as additional products have been added in an attempt to tame the volatility of Bitcoin.
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The exact count for hedge funds created around Bitcoin in 2017 is unclear, but some believe there are more than 120 new entities. So far, the high liquidity of the BTC market price seems to fit well with the strategies of hedge funds. A rough estimate sees crypto funds with $2.3 billion of assets under management- still a comparatively small amount compared to traditional asset and wealth managers.
Funds use different strategies, as some trade the old-fashioned way, while others rely on artificial intelligence and machine-learning algorithms. But even buying and holding Bitcoin outright would yield returns of up to 1,900% for 2017, based on the recent rise in Bitcoin's price.