The future of digital assets in the hedge fund space

The Alternative Investment Management Association (AIMA) recently shared their 4th Annual Global Crypto Hedge Fund Report. In this report, the organisation worked alongside PWC and Elwood to distill key insights for the alternative investment sector.

In part of a survey conducted for the report, it was shown that roughly 33% of traditional hedge funds are currently investing in digital assets. This is an increase from last year’s statistic which was 21%. As it stands, 67% of the hedge funds surveyed who are currently investing in digital assets have set objectives to deploy more capital into this asset class by the end of the year.

At present, 57% of  the hedge funds intending to deploy more capital into digital assets have less than 1% of their total hedge fund AuM in digital assets. A third of the firms interviewed have between 2%-5% of their AuM invested.

In addition to documenting the growth of digital assets within the hedge fund space, the report also shared how firms are invested in digital assets. When prompted with the question ‘which types of digital assets are hedge funds invested in’, a majority of respondents are invested in the two biggest cryptocurrencies by market capitalisation and exchange volume. These are BTC and ETH, which sit at both 67% respectively. When it comes to other tokens on centralised exchanges, 29% are invested, whereas 24% are invested in tokens on decentralised exchanges.

Whilst it is clear that hedge funds are looking to develop growth and build exposure in the digital asset class, there are potential challenges needed to be overcome. According to AIMA, 83% of hedge funds interviewed stated that regulatory and tax uncertainty continues to cause uncertainty. The current global regulatory framework is fragmented and there remains to be unclear guidance. In addition to this, firms are seeking greater service provider availability.

In order to successfully enter and capitalize in the digital asset space, firms need support with their data governance for the regulatory side of business. This is particularly important when it comes to cryptocurrencies. When it comes to designing a robust regulatory solution for hedge funds, security and compliance are the building blocks. Not only should this strategy keep digital assets safe, it should meet the standards of both investors and government regulation.

In addition to these two concerns stated by hedge funds who are investing in digital assets, cybersecurity is equally as important. Fund managers must be able to protect intellectual property and securely manage data in the digital realm for clients. As more traditional hedge funds seek to invest in this space, there will always be a looming threat of cybercrime that needs to be both addressed and overcome. In 2020, Ciphertrace shared data showing that crytocriminials stole a total of 1.9 billion (USD). In August last year, over 600 million (USD) was stolen in a crypto heist. It was one of the biggest thefts to date.

In order to minimise the risk of such events happening in the future, traditional hedge funds must invest in their cybersecurity solutions so they can manage their digital assets with secure systems in place.

The future of hedge funds to truly thrive in the digital assets space is threefold. It is the investment of these assets, the security of managing them and finally, being able to competently conform to compliance and regulatory requirements.  This requires a robust cybersecurity strategy and managed data services provider to guide a fund to be able to successfully reach these goals.