Crypto Hedge Funds Doing Terribly: Rarely More Profitable Than HODL

If there’s one that we can say about crypto in 2018, its that the markets have taken an absolute beating. With every single sector of the cryptocurrency sphere losing substantial amounts of money, the prevailing narrative has been, ‘Where is the bottom?’.

This is a question that many of the industry’s foremost experts have claimed that they have answers for. However, many of the public statements and predictions that have been issued by these crypto insiders and ‘experts’ has proven to be wrong by a large mark.

Given that the majority of these experts and crypto insiders run their own hedge funds, it seems appropriate to once again reflect back on the performance of these funds to assess whether they have been able to successfully navigate the waters throughout this crypto bear market.

What is a Hedge Fund?

Before looking at the performance of various crypto hedge funds, it is important to first answer the question, ‘What is a hedge fund?’.

Simply put, a hedge fund is:

Source: https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp

To add to the above definition, hedge funds are essentially investing entities whose purpose is to take pooled money (often from outside investors) and place it in various investments with the goal of receiving a positive return on investment.

Hedge funds are often consulted because the fund managers, or the individuals running the firm, are considered to have the expertise necessary to navigate the markets and garner a profit.

Inception of Crypto Hedge Funds

It is no secret that the gains in 2017 were absolutely meteoric across the board. In many cases, placing a flat investment in just about any project in the top 100 would yield a superb return on investment that was sometimes in the ball park of 1,000%+.

It was during this time that the majority of cryptocurrency hedge funds began to crop up in the space.

Research by Autonomous Next (published in CNBC), showed that there were over 120 crypto hedge funds in existence as of October 27th, 2017, and that these hedge funds had over $2.3 billion in capital being managed.

Source: https://www.cnbc.com/2017/10/27/there-are-now-more-than-120-hedge-funds-focused-solely-on-bitcoin.html

However, this explosion in growth pales in comparison to what we’ve seen for 2018:

Source: https://next.autonomous.com/insights/analysis-of-crypto-funds-by-inception-strategy-and-estimated-aum

There have only been 61 cryptocurrency funds created in 2018 vs. the 195 that were created in 2017. That’s a decrease of approximately 70%. This foreshadows the results of some of the top crypto hedge funds, which we will discuss a bit later in this piece.

However, this should not come as a surprise to anyone at this point because the performance of the crypto markets has been absolutely abysmal throughout the entirety of 2018.

On their research page, Autonomous Next notes that:

“The inception of 61 funds in the first half of 2018 means barriers to entry such as market volatility and significant start-up costs do not pose as significant deterrents to new entrants seeking exposure into the crypto space.”

So, there is plenty of room for others to enter into the fund space in crypto and gain success but the primary deterrent at this point is probably motivation.

We’ll explain more below.

Cryptocurrency Hedge Fund Performance

For this portion of the analysis, we will be making interpretations of data provided by EurekaHedge on their website.

Source: http://www.eurekahedge.com/Indices/IndexView/Eurekahedge/682/Eurekahedge_Crypto_Currency_Hedge_Fund_Index

The picture above is a chart of the ‘Eurekahedge Crypto-Currency Hedge Fund Index’.

Below, is a description of how this index was composed:

“The Eurekahedge Crypto-Currency Hedge Fund Index is an equally weighted index of 16 constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers that allocate to bitcoin and other crypto-currencies. The index is base weighted at 100 at Jun 2013, does not contain duplicate funds and is denominated in USD.”

The above definition is pretty unambiguous, so we won’t waste any time in defining the constituents of this indices.

Unfortunately, information on who the constituent funds are that were included in this indices cannot be accessed without a membership (love you guys, but not that much!). The author has attempted to receive trial access to this information, but don’t hold your breath.

However, there is plenty of other things that we can look at — namely, the metrics for the index.

Cryptocurrency Hedge Fund Metrics

Source: http://www.eurekahedge.com/Indices/IndexView/Eurekahedge/682/Eurekahedge_Crypto_Currency_Hedge_Fund_Index
Source: http://www.eurekahedge.com/Indices/IndexView/Special/682/Eurekahedge_Crypto_Currency_Hedge_Fund_Index#

Let’s go ahead and cover each category on a one-by-one basis so that we can quantify the performance of these crypto hedge funds on a more thorough level.

Annualised Return (%)

In this regard, the crypto funds actually aren’t doing that bad. However, this is probably due to the fact that 2017 yielded such amazing returns.

Before we dive into this category, let’s define this metric.

What is ‘Annualized Return’?

Source: https://www.investopedia.com/terms/a/annualized-total-return.asp

At the time of writing, Eurekahedge reports that the annualised return is currently at 128.36%, which is pretty good. However, one would have had to be invested in this index in 2013 in order to see returns that are anywhere near the ballpark of that figure.

Also, when considering the total returns in 2017 for this index was a whopping 1,708.56%, it speaks volumes to the sheer loss for this index during the ‘down years’.

Which brings us to our next metric (going out of order here).

Annual Performance

Annually, the returns on this index have been wildly unpredictable. As stated above, the Eureka Hedge Crypto Hedge Fund Index only spans back to 2013, so it would be unreasonable to look for an underlying trend with such a smallsample size.

However, the data on the returns for each of the years track vary in size so significantly that it is hard to imagine that any definitive trend will emerge for many years. In many aspects, this fluctuation in return data on a year-over-year basis is indicative of just how early we are in the crypto space’s infancy.

Let’s take another look at the annual performance stats below:

Specifically, we’re going to be looking at the YTD column:

We can make the following observations:

  1. 2013 and 2017 were the best years by far, posting gains of approximately 905% and 1,708%, respectively.
  2. Both outlier years (2013, 2017) were followed by substantial losses. In 2014, the index lost 54.25% of its value, and in 2018 (at this point), the index has lost 64.90% of its value. Its worth noting that 2018 has not yet concluded, but with only 18 days left in December (at the time of writing), it seems safe to say that there is no singular event that will reverse all of the losses in the crypto space in just 18 days. Therefore, we can safely conclude that 2018 will result in a loss as well.
  3. 2015, which followed the massive loss in 2014, was positive. If the crypto markets are to follow suit, then it would be reasonable to expect that 2019 may yield positive returns from where the index is currently at the time of writing (-64.90%). However, there is no guarantee that this ever happens.
  4. Only 2014 and 2018 have been in the negative for crypto hedge funds (among constituents within the EurekaHedge study) and this is also true for the crypto market as well.
  5. The only positive month in 2018 was April and July. In every other month, the crypto hedge funds posted a loss.
  6. November 2018 was the first November in which crypto hedge funds (and crypto overall) posted a loss.
  7. March 2018 was the worst month for the index (-33%) ever.
  8. November 2013 was the best month for the index (+405.30%) ever.

Now let’s analyze the given statistics of this index.

Crypto Hedge Fund Statistics

Most of the statistics depicted above have already been discussed at this point. For example, we have covered; the annualized return %, 2018 return %, 2017 return %, last 3 months %, as well as best and worth monthly return %.

However, we have not looked at the return since inception. Currently, it is up 8,661.10% overall.

Comparatively, if one invested in Bitcoin on June 1st, 2013 (when the index began tracking the funds) to this point, your return on investment would be 2,923%. So, the fund has outperformed merely buying and holding Bitcoin from its inception to the time of publication.

Crypto Hedge Fund Performance Versus Bitcoin on a Year-over-Year Basis

June 1st, 2013 — December 31st, 2013

Bitcoin = 590%

Eureka Hedge Fund Index = 905%

January 1st, 2014 — December 31st, 2014

Bitcoin = -41%

Eureka Hedge Fund Index = -54.25%

January 1st, 2015 — December 1st, 2015

Bitcoin = 132%

Eureka Hedge Fund Index = 57.56%

January 1st, 2016 — December 31st, 2016

Bitcoin = 222%

Eureka Hedge Fund Index = 90.34%

January 1st, 2017 — December 31st, 2017

Bitcoin = 1,338%

Eureka Hedge Fund = 1,708%

January 1st, 2018 — December 13th, 2018

Bitcoin = -76%

Eureka Hedge Fund = -64.90%

Conclusion From Stat Comparison

In 3 out of the 5 years that the index has been an investing instrument, it has failed to beat out the strategy of simply buying Bitcoin on the 1st of that year and selling it on the very last day of the year.

This stat is perhaps the most troubling, especially when considering that the vast majority of these hedge fund managers posit themselves as “experts” on the cryptocurrency space.

Chances are that a basket of 10 evenly weighted cryptocurrencies picked at random from the top-100 would have outperformed this index. Therefore, the idea of using this indices or consulting these funds directly in order to garner a profit is a bit questionable.

The other statistics in the chart posted above are fairly straightforward, so we’ll wrap this piece up with the information presented above to cap off this investigative deep dive (for the time being).

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