Virtual money is becoming more mainstream amid increasing attention on the market fuelled by the spectacular rise of bitcoin, the most well-known cryptocurrency, last year. It rose from $3,775 in November 2018 to a high of around $64,000 in November 2021 before falling to its current price of around $19,000.
But large hedge funds and asset managers have so far been reluctant to move into the sector. Mercer, which advises pension funds and other investors, said in February 2022 that cryptocurrencies are not investable.
Fund managers thoughts
Some bottom-up fundamental stock-pickers regard cryptocurrencies as speculation tools. Diamond Hill Large Cap (DHLRX) manager Austin Hawley said that this seems to be the way most people use them. He doesn’t see a compelling, long-term investment case for them now largely because, unlike traditional stocks or bonds, digital currencies don’t produce cash flows, which makes determining their intrinsic value difficult.
Others watch crypto to see how it might impact their portfolios. Janus Henderson Enterprise (JMGRX) comanagers Brian Demain and Cody Wheaton don’t see many investable opportunities but are on the lookout for how blockchain technology might disrupt or inspire their current holdings to adapt. Broadridge (BR), a provider of communication and technology services to financial companies.
Matt Dennis, comanager of Invesco International Growth (AIIEX), also thinks Ethereum has more potential than bitcoin. He says it has more uses and concedes that there’s a clear demand for alternative stores of value. But in general, he is more interested in blockchain technology than in cryptocurrencies themselves, saying there’s a lot going on behind the scenes with blockchain that shouldn’t be dismissed just because of the well-documented volatility and perhaps-excessive enthusiasm surrounding bitcoin.
Numbers and figures
The number of traditional hedge funds not investing in crypto assets dropped to 62% of respondents, down from 79% a year ago. About one-third, or 29%, of hedge fund managers that aren’t yet investing in digital assets, said they are in late-stage planning to invest or looking to invest.
The number of hedge funds focused on crypto has potentially grown to more than 300 globally, with half launched in the past three years. The 300 funds are a small piece of the overall hedge fund market, globally, there were 8,259 funds in the first quarter. Although more traditional hedge funds are getting into crypto, most still exercise caution. According to the survey, 57% allocated less than one percent of their total assets under management (AUM) to cryptocurrency.
Also, 41% of asset managers not investing in digital assets said they are not likely to gain such exposure in the next three years. Another 31% are curious about cryptocurrency but prefer to wait till the market reaches robust maturation. Meanwhile, regulatory uncertainty was the biggest barrier for respondents not involved in crypto investment, while hedge funds with such exposure said that the absence of tax and regulatory clarity was a major challenge.
