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Crypto Uncertainty Triggers Hedge Fund Exodus, PWC-AIMA Survey Shows

As recent market turbulence unnerves the global hedge fund industry, a growing number are exiting the crypto sector, according to a recent survey.

Cryptocurrency logos
Cryptocurrency logos

Hedge Funds Becoming Wary of Crypto Exposure

Tuesday's survey reveals a significant pullback from the crypto sector by hedge funds not specifically focused on such assets. The tumultuous nature of the industry, marked by considerable uncertainty and upheaval, has spurred a flight to safer investment avenues.

A Decline in Crypto Interest among Traditional Hedge Funds

According to a joint report from PWC and the Alternative Investment Management Association (AIMA), there's been a considerable decrease in the number of traditional hedge funds investing in crypto assets. The figure has fallen from 37% in 2022 to 29% this year, illustrating the growing caution in this investment area.

The Threat of Increased US Regulation Fuels Uncertainty

The survey further notes that a quarter of the remaining hedge funds invested in crypto are apprehensive about the future, citing concerns over the potential tightening of US regulations. The possibility of more stringent controls and oversight may even lead them to withdraw from the asset class entirely.

Market Volatility Influences Investment Decisions

Tumultuous market events in the previous year have heavily impacted investment decisions for more than 70% of the surveyed hedge funds. These funds collectively manage a whopping $280 billion in assets, suggesting the repercussions of these shifts are felt far and wide.

Crypto Industry Troubles and their Aftermath

The past year saw the crypto industry rocked by bankruptcies of major firms, including the US's leading exchange, FTX. Investors incurred significant losses as token prices plunged and companies froze customer withdrawals. Despite bitcoin's steady recovery this year, investors remain wary, especially as US regulators ramp up action against non-compliance within the industry.

The Fundamental Shortcomings of Digital Assets Space

"The digital assets space is grappling with issues related to risk management and allegations of corporate wrongdoing," states Jack Inglis, AIMA Chief Executive. These fundamental shortcomings, coupled with reputational risk, a lack of regulatory and tax clarity, and unreliable data, have deterred many traditional hedge funds from crypto trading.

Wait-and-See: The Majority Stance on Crypto Investments

For over half of the survey respondents not currently invested in crypto, the prudent strategy is to await further regulatory updates. Bitcoin and Ethereum remain the primary choices for hedge funds venturing into crypto, with investment strategies primarily focused on multi-strategy (41%), systematic (29%), macro (12%), and equity (12%).

Future of Crypto in Hedge Fund Portfolios

Despite the overall uncertainty, almost half of the hedge funds trading in crypto expressed intentions to increase their investments. However, they maintain a conservative stance, with crypto accounting for only 2% of assets under management.