Bitcoin buzz lures hedge funds

The surge in Bitcoin that so remarkably broke through all expectations in 2020 was driven by institutional investors, including hedge funds, according to a new research report from Lyxor. Hedge funds have embraced digital currency and bitcoin, according to the firm, alongside retail investors and family offices, creating dedicated investment vehicles. Recently fund of hedge fund firm SkyBridge pitched its flag in the space launching a dedicated Bitcoin offering. Bitcoin’s correlation with gold and inflation, and to some extent equities, has become reasonably stable, Lyxor asserted in its latest research report on the subject. The research group reported that all hedge fund strategies were up in early January, led by the most directional strategies, in particular long/short equity diversified and special situations strategies. Less directionality in credit and hesitant quant factor trend only moderately benefited long/short credit and long/short market neutral strategies. Still Bitcoin strategies have had a break-out moment. According to hedge fund data and index provider HFR, blockchain and cryptocurrency exposures continued to deliver strong performance as cryptocurrencies hit record highs last month. They too report hedge funds increasingly incorporating related exposures into new and existing fund strategies. The market is gaining depth, Lyxor analysts said, both in the types of investors and the product range. Most managers previously focused on long positions on crypto assets, including Bitcoin, Ethereum or Ripple. But now, managers are using swaps, futures and options indexed on cryptocurrencies, and they also focus on income generated by the underlying technology. The HFR Blockchain Composite Index gained 18.6% in December, vaulting FY 2020 performance to 190.1%, while the HFR Cryptocurrency Index increased 18.3% for the month of December alone. This is despite a 20% drop in Bitcoin that forced many to wonder whether a ceiling had been hit. As of last week, Bitcoin was valued back above $36,000. Some hedge funds have shifted to investing in securities issued by companies involved in crypto assets and their infrastructures, but most of these remain only accessible via venture capital and private equity funds. Primarily, discretionary and quantitative hedge fund approaches have been incorporating digital assets to date, Lyxor analysts said. The inefficiency in the market though may leave some room for arbitrage and volatility will obviously draw more speculation in the market. “Moreover, the absence of a central authority to step in in times of crisis leaves investors without backstop,” wrote Lyxor officials in the recent commentary. “Risks also come from the complexity of crypto technologies and the surging supply of digital assets, through this nearly $1 trillion market remains dominated by two providers.” Lyxor said that its valuation indicators are flashing red and a normalization in momentum forces could also mean that selling pressures remain. They see the institutional enthusiasm as cooling and therefore allowing time for another run up in assets that will be supported by a more robust institutional toolkit -- including central bank initiatives and commercial bank activity. To be sure, institutional initiatives are afoot as can be seen by Northern Trust prepping a crypto custodial asset business. All signs indicate that 2021 could be an even bigger year for Bitcoin.

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