Did You See THIS? Crypto Hedge Fund Research!!

What's going on in the crypto hedge fund Space are they dying surviving or Thriving and how have their strategies Changed in the wake of the FTX collapse Well this has all been answered in a Recent crypto hedge fund report one of The most comprehensive since sbf's Empire went down the toilet in this Video I'm going to take you through this Research and expand on some of the most Important findings so grab a beverage Make yourself comfortable and let me Tell you all about it The report that I'll be covering today Is by 40s research which is part of the Numeous group a diversified digital Asset management company it's titled Quote the emergence of crypto hedge Funds opportunities and Outlook and I'll Leave a link to it in the description For you if you want some light bedtime Reading So the report kicks off with an overview Of how the crypto hedge fund space is Currently positioned there are three Broad categories of funds that invest in Digital assets hedge funds Venture Capital funds and passive funds the Report's authors have broken these down In this chart over here and arrange them According to their liquidity profiles They further broken the chart down into Different strategies that these funds May employ in the crypto hedge fund

Space I.E active investors there are Three prominent strategies Arbitrage Liquidity provision and trading and Fundamental analysis they state that the Crypto hedge fund space has evolved in Much the same way as the traditional Hedge funds base did in earlier years I.E that it was initially dominated by Renowned macro funds run by prominent Traders before developing into a more Diverse ecosystem with wider ranging Strategies In the crypto hedge fund space in Particular those that were more willing To risk trading digital assets were high Net worth individuals and family offices The authors also note that in the 1990s The traditional hedge fund space was Still a quote cottage industry and only Evolved into an established sector in The early 2000s this was when these Investors got more active and talent Migrated from investment Banks and other Sectors of tradfy therefore the authors Are of the view that the crypto hedge Fund space could undergo a similar Trajectory having said that they do note That the events of 2022 have set back That institutional adoption an Understatement If Ever I heard one now As we've said many times before these Institutional investors are likely to be Sitting on the sidelines until there is Greater regulatory oversight of the

Industry not something that the rest of Us crypto natives really want but Something that we do on unfortunately Need Over here meanwhile the authors talk About the ongoing growth in the crypto Hedge fund sector assets under Management in the space have grown from Just over 10 billion dollars in Q4 of 2018 to a peak of over 70 billion Dollars in late 2021. the chart ends in Q3 of 2022 when the AUM was just below 55 billion dollars however that doesn't Capture what happened with FTX so one Can assume that the AUM number is Considerably lower now That aside there are more than 800 Active crypto funds where the liquid Investing strategy takes up at least More than half of that AUM as these Funds have grown in Prestige they've Also moved to limit investor access Therefore some of the best performing or Most esteemed funds have become harder To invest in As the crypto hedge fund space has grown So too has the move to quote Alpha Centric strategies or more specifically Strategies such as liquidity provision Arbitrage and trading you can see what That looks like in this chart over here It lists the number of funds employing Particular strategies that 40s tracks This makes sense when you consider how

Much the industry has advanced since the First crypto funds hit the scene in the Early days the industry didn't have the System's Talent OR liquidity to Effectively run an advance crypto Trading algorithm whereas now there is a Lot more in the way of infrastructure to Support these more advanced methods of Arbitrage more on that in a bid and Speaking of talent and infrastructure These funds are also setting up their Bases in cities that tend to be already Pretty well established hedge fund hubs These include the likes of New York Hong Kong and London you can see what that Looks like in their handy map over here They've also broken it down into the Type of strategy and compared it to how It looked all the way back in 2016. it Seems as if growth in Europe and the Americas has been much more pronounced Than in Asia perhaps that's because Places like Hong Kong which used to be a Hedge fund Hub have since waned in Prominence when it comes to the Strategies that were employed in these Areas it appears as if asia-based Managers are more active in their Approach whereas those in the west tend To be more passive Talent is also a key Component in these funds being able to Continue their growth one of the biggest Trends that we've seen over the past few Years has been the migration of talent

Away from tradfy to the crypto space There have been professionals who have Come from both the buy side other funds As well as the sell side investment Banks as I said part of the reason why These funds have been able to expand Their investment strategies to more Advanced Alpha generating strategies is Because of the talent they've been Taking on board Now this chart over here is particularly Illuminating it shows the average Experience level in years of all those People who have entered new crypto funds In three different periods for example In the period from 2015 to 2017 over 40 Percent of those getting into funds were Doing so with virtually no experience in Finance however in the period from 2021 To today over 40 percent of those Joining or starting new funds have over 15 years of Finance experience the Proportion of those with no experience Has since Fallen to below 10 the Industry has in other words matured Pardon the pun now on top of the need For that Talent the crypto hedge fund Space also needs the infrastructure to Manage their assets from risk management To custody to trade execution and Settlement in some cases these Trad fire Giants are looking to take market share Away from crypto native operators they Mention the case in the crypto custody

Space where the likes of fidelity and Bny melon are looking to offer services To clients that would otherwise have Considered the likes of Anchorage or Copper however those companies that have Been operating in the crypto space for Some time are also going to benefit from The expanded infrastructure Solutions These tradfi firms are going to be Offering The authors have an example over here of Coinbase's tie up with BlackRock to make Crypto trading available through the Latter's Aladdin trading platform more About that in the description You can get a bit more of a sense of how This looks in the chart over here which Groups companies by their function as Well as whether they are crypto native Or tradify players something that sticks Out to me here is the fact that there Are no Trad five Prime Brokers offering Crypto funds services so that could be a Potential target market it also shows us That there aren't any crypto native fund Administrators or Auditors however my Guess is that this isn't something that Crypto firms would particularly want as They would prefer to get their accounts Signed off by reputable well-known Auditing firms of course getting a firm Like that to work with a crypto business Is easier said than done just ask Binance

The authors do note however that it's Still early days they also admit that The collapse of FTX has meant that many Of these Trad fire Giants are pretty Reluctant to service crypto firms Especially if it can have negative Implications for their business in that Context it's ironic that they have Silvergate there in the banks category Given that its exposure to FTX has led To its potential insolvency not a good Look in my opinion Anyway moving on from that depressing Topic this next section over here looks At today's crypto hedge fund landscape More specifically the authors talk about How crypto hedge funds provide an Alternative to the quote Alpha erosion That we've seen in the tradify hedge Fund space this Alpha erosion is a Serious issue for the tradify space when You look at those historical returns for Example over the past 10 years tradfi Funds have generated close to zero Percent Alpha when compared to the S P 500 that can be seen in this chart over Here which has the 36th month rolling Alpha of the hfri the hedge fund return Index it's way down and in some of those Years they even generated lower returns Than the s p Benchmark itself there are A number of reasons for this which the Author's detail in the chart below so Let's run through them quickly increased

Efficiency in public markets this has Impacted on the manager's ability to Make gains from mispricings this is the No Arbitrage condition of perfectly Efficient markets increase competition Quite simply larger pools of capital are All chasing the same opportunities Massive amounts of stimulus have Compressed volatility which in turn Reduces opportunities for Alpha inflows From passive allocators are distorting Those valuations institutional investors Are turning away from public markets in General this means that funds are in a Unique position to generate Alpha in the Crypto space as the authors say this Mirrors the profitable opportunities That existed in tradfi back in the 2000s However on the flip side of that Alpha Coin is the fact that there are Structural inefficiencies that provide Their own unique challenges for the Crypto space the authors list them in The same table and they are Fragmented Market with weak price Discovery quite simply an asset may be Over or underpriced for some time before It eventually corrects therefore Managers that try to exploit any Mispricing have to have an adequate Buffer to protect them from these Potential scenarios 24 7 trading crypto Remains the only Market that is always open this creates

A unique Challenge from a risk Management perspective especially in Those hours when Market liquidity is Lower I.E more volatility retail driven Trading volume the amount of volume That's coming from retail is a challenge For these funds that's because it's Often unpredictable and makes it harder To manage that risk High Market Volatility self-explanatory Rapid pace of innovation means that These investors have to constantly be on Their toes and finally that regulatory Landscape is the only thing more Volatile than prices we have no idea Where it's heading now that last one has Become increasingly relevant in the wake Of news that the SEC is trying to make It more difficult for hedge funds to Work with crypto this is related to rule Changes which would make it harder for Crypto firms to obtain the qualified Custodian status I've linked to some Stories about that in the description For you folks so it's by no means going To be a walk in the park but it will Still be worth it when you consider the Wide array of strategies that could be Employed for a quote rich source of Alpha that's covered in this next Section over here in this chart the Authors have separated out the alpha Generating strategies from the more Market fundamental beta strategies the

Broad buckets of alpha strategies were Those mentioned at the beginning of the Report Arbitrage liquidity provision and Trading within each of these broad Categories they have numerous different Strategies They've been broken down in this handy Table with a brief description as well As a cool fact that relates to that Strategy I won't go over all of them Here but there are a few that really Stood out for me firstly when they talk About lending which is defined as quote Fully or over collateralized lending on Defy and centralized platforms they Claim that there is minimal default risk This is true for the defy kind but Definitely not for the centralized Platform variant just asked Genesis About that so that's important to note Over here the authors talk about Cash And Carry which is a strategy that Involves Futures curve roll down what's Fascinating is that such a plain vanilla Strategy is still able to generate up to 100 apy in periods of high Market Volatility that's further proof of the Alpha available in the crypto space Another strategy that's of interest is That of triangular Exchange change Arbitrage that's basically when funds Buy or sell different mispricings across Other exchanges while these used to be Incredibly lucrative in the past their

Arbitrage gains have fallen more Recently however according to the fun Fact over here back in November of last Year there existed a price difference of Up to two percent across exchanges That's pretty lucrative for what can be A zero risk strategy speaking of Arbitrage there are also opportunities For statistical Arbitrage on specific Exchanges Binance lists over 1400 trading Pairs And the chances are pretty high that Miss pricings regularly present Themselves between more than one of These pairs anyways one of the reasons That unique opportunities like this Exist in crypto is because of the wide Range of venues where they can be traded There are over 400 different venues Available to crypto fund managers on the Sex side these exchanges are based in Different jurisdictions and service Different regions where local supply and Demand impact on pricing remember that Kimchi premium in South Korea you can Also add to this the proposition offered By decentralized exchanges which often Have their own unique reasons for Diverging from market prices and finally We have the various listed products on Institutional regulated exchanges these Include the likes of the grayscale Investment Trust as well as CME Futures Etc

To illustrate just how much these prices Can diverge the authors have this chart Over here which compares the eth usdt Price difference between binance and okx During the collapse of FTX at one point The price is diverged as much as three Percent pretty crazy for such a liquid Pair on to this next section though Which looks at the crypto derivatives Market now there's no doubt that the Derivative Market has grown considerably Over the past four years today at least 65 percent of the volume of digital Asset trading is via derivative products One of the most prominent of these is The Perpetual swap which has created a Host of basis trading opportunities Demand for Futures Trading by retail Traders in the 2021 bull market drove The funding rate in these Perpetual Futures contracts to record highs during That period funds that simply went long Bitcoin and short the BTC Perpetual Could have seen in excess of 100 Annualized Perpetual returns these Opportunities have compressed in the Bear Market but the differences between These funding rates are quite volatile Across various exchanges you can see What that looks like on this chart over Here on top of this the proliferation of Perpetual products on a number of other Altcoins have allowed for more complex Statistical Arbitrage opportunities

These opportunities as well as all those Other strategies that I've mentioned Have meant some pretty outsized Alpha For those that have exploited them over Here meanwhile the authors try to Compare the returns that have been Generated in the tradfi hedge fund space With those of the crypto hedge funds More specifically they compare the the Historical performance of Arbitrage and Liquidity provision strategies with the Hrfi that we talked about earlier the Results are presented in this chart over Here and they speak for themselves since December 2018 crypto funds have returned Almost 120 whereas Trad five funds have Returned less than 20 percent so put Another way Arbitrage and liquidity Provision strategies outperformed the Hrfi global index by 84 and 88 Respectively what's perhaps even more Surprising than this is the fact that Despite the massive Market drawdown over The past few months quote both liquidity Provision and Arbitrage managers Continue to produce positive Single-digit returns and outperform Their traditional hedge fund peers so Even though crypto markets went through Some of their worst Market turmoil ever Hedge funds operating these strategies Still beat Trad five funds now that is Some real Alpha the authors don't only

Look at those hedge funds that employed These specific strategies however they Also studied those funds that embarked On trading strategies and how they Compared to the General market Trend Index Managers that the researchers followed Produced an annualized return of 71.3 Percent over the period versus 25.5 Percent for the trend index you can see What that looks like over here Despite the gains over the period there Is no doubt that 2022 was one of the Most challenging trading environments For the crypto hedge fund industry which Brings us on to the next section of the Report On average in 2022 crypto funds that Followed a liquidity provision and Arbitrage strategy returned at least 7.1 Percent and 4.2 percent respectively While that sounds impressive the caveat Here is that it excludes the impact of FTX which I must admit kind of Invalidates those results that said the FTX collapse impacted funds in different Ways some like multi-coin for example Had sizeable but not terminal exposure Others like gallois capital and ikigai Lost the majority of their assets on FTX In the case of these latitude the FTX Losses were terminal events then there Were funds that either managed to get All their assets off FTX or didn't use

The exchange at all these funds may have Had limited direct exposure to FTX and Hence were able to ride the storm and Preserve many of those bull market gains Moreover given that FTX has taken out Those funds that operated poor risk Management those that remain are likely To make additional profit due to reduced Competition not only that but the Collapse of FTX has been a great Learning experience for all those funds That managed to survive That's the subject of the next few Sections over here where the authors go Through a number of steps that should Have been taken to manage risk they Detail the importance of operational due Diligence as well as a number of Counterparty risk steps that funds could Take to avoid situations like this in The future I won't go into it all here but I do Encourage you to take a read when you Have the time it's helpful not only to Those who run funds but also retail Traders who want to manage their own Risk so that's most of the report but I Wanted to give you a few of my thoughts On the findings firstly it's pretty Clear that the crypto space has Rich Pickings for funds who are still Entering the sector despite the fact That there's a lot of competition market Inefficiencies and dislocation create

Ideal opportunities for Arbitrage and Liquidity provision other strategies Like Futures carry which are dull and Low Alpha in Trad fire markets are still Able to return almost 100 percent Annually that's pretty unheard of These crypto funds have also been Outperforming tradify funds by almost 100 annually over the past four years Even if we were to account for the Collapse in the market over the past Four months they are still performing Better than their Trad fire counterparts This can mean only one thing that the Migration of capital talent and services Into the crypto fund space is inevitable Of course there are going to be Challenges there is still a regulatory Cloud that hangs over the industry and All the agencies and politicians are Going to do their darndest to limit the Sector's growth but you can't stop Capital allocators from investing in a Market that is generating such amazing Alpha the only thing that's going to Stop this from happening is if the alpha Itself evaporates but we are far from That this inevitable growth in the Crypto fund business is perhaps one of The reasons why coinbase bought the Crypto business of One River Asset Management last week they know that These large pools of capital from a wide Swathe of investors are dying for Alpha

Of course the FTX collapse posed a Number of challenges it wiped out funds And left a nasty smelly SPF shaped stain On the industry But this was isolated it was fraud and Those funds that went under didn't Practice adequate risk management it's Also an event that's likely to inform Future risk management for those funds That do survive not only that but they Will be competing in a less crowded Space which could also help them Thrive So in conclusion as long as there's Money to be made there's Alpha to be Gained by these institutional Giga chats And that's all for my video today folks I hope you enjoyed it if you did like Subscribe and share por favor I also have to tell you about my socials Page this has links to my Twitter Telegram Instagram and Tick Tock lots of Content there that you're not getting Here you'll also find a link to my Newsletter which is where I share my Personal portfolio as well as my video Pipeline the link to that bad boy is Below oh and if you're looking for some Of the best promos and discounts in the Crypto space then my deals page is where You should go that is down below as well Okay time's up for this crypto guy but I'll be seeing you guys very soon


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