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Despite the currency’s rebound, 150 crypto funds remain extremely risky

Cryptocurrency prices have risen to levels not seen in at least nine months, reviving the 150 crypto hedge funds that have weathered Bitcoin’s painful near-75 percent drop since the crypto-frenzy peaked in December 2017. In 2018, these crypto hedge funds self-reported a 46 percent drop in assets, with several of them on the verge of going out of business.

Some market professionals are now warning that the great majority of these funds are extremely dangerous and have little liquidity. According to the Financial Times, most crypto hedge funds have assets of less than $10 million, raising concerns about the long-term viability of their business model.

WHY ARE CRYPTO HEDGE FUNDS HAZARDOUS?
Regulatory pressure is increasing in response to a surge of allegations of cryptocurrency fraud and market manipulation.
Fewer than ten crypto hedge funds manage assets worth more than $50 million.
The valuation of a crypto hedge fund, particularly one that holds illiquid coins or invests in early-stage enterprises, is “difficult.”
The lack of independent directors on the boards of three-quarters of crypto hedge funds raises questions about corporate governance standards and potential conflicts of interest.
The Financial Times is the source for this information.
The Digital Asset Market Is Facing Headwinds
Bitcoin’s drop in 2018 imposed severe losses on most crypto hedge fund managers, according to a report co-authored by PwC and Elwood, a digital asset manager owned by Alan Howard, the billionaire co-founder of the Brevan Howard hedge fund. According to the Financial Times, many of the funds that did survive are still struggling to stay afloat.

Meanwhile, regulators have made significant claims of market manipulation and fraud in an attempt to paint the crypto space in an unfavorable light. The New York attorney general announced earlier this month that he was investigating a big crypto operator accused of concealing over $1 billion in losses. Last year, Benoît Curé, the eurozone’s top central banker, referred to bitcoin as “the demonic spawn of the Financial Crisis.”

Management Concerns, Performance Data
Fewer than ten crypto hedge funds manage assets worth more than $50 million. Pantera Capital, based in Silicon Valley, and Polychain Capital, backed by well-known venture capital firms Andreessen Horowitz and Sequoia Capital, are the two biggest contenders. Last year, the median crypto hedge fund lost 46 percent, while quantitative crypto hedge funds, which can take short bets, made a meager 8 percent gain.

“All performance data was self-reported by each crypto hedge fund, and this information has not been confirmed by their respective fund administrators,” Henri Arslanian, a PwC fintech and cryptocurrency expert, cautions. He goes on to say that evaluating a crypto hedge fund, particularly one that holds illiquid coins or invests in early-stage ventures, is “difficult.”

Worse, about 75% of crypto hedge funds do not have independent directors on their boards, creating serious concerns about corporate governance and potential conflicts of interest.

“Having the portfolio managers also control the board may work for ‘friends and family’-style funds, but an institutional investor is unlikely to contribute cash to a crypto fund that has basic governance,” Arslanian added.

This comes as the price of Bitcoin has increased by more than 100% this year, causing global crypto hedge funds’ average assets under management to increase by more than threefold in the first quarter, according to CoinDesk.

Looking Forward
It’s worth noting that another price drop could force many of these 150 funds to close their doors. However, as digital currencies move into the mainstream and attract the interest of major organizations and institutional investors, the crypto hedge fund sector is considered as simply one aspect of an expanding ecosystem for digital currencies.

“More investor and regulatory attention is surely a significant step toward digital assets being recognized as a legitimate asset class with true viability,” said Bin Ren, CEO of Elwood.
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Written by Winston Williams

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