In a volatile market, new data shows that hedge funds with crypto strategies have lower volatility than common crypto exchanges.
In the exclusive analysis of Institutional investor, Markov Process International concludes that crypto hedge funds tend to perform as well as Bitcoin, but with less downside risk. The analysis also found a large diversification between funds.
“These hedge funds add value, but you need to know what you’re doing,” said Michael Markov, CEO of the company of the same name. “There are companies with good funding. Diversification also helps.”
The analysis is particularly relevant after two months for most currencies tracked by. CoinMarketCap.. However, this is not surprising for crypto investors.
“This kind of volatility we have experienced is not surprising,” said Joe Marenda, Global Head of Digital Asset Investment at Cambridge Associates. “Honestly, a 50% drawdown of cryptocurrencies is expected.” However, the new one is Luna / Terrace Table Coin Explosion And a decision by crypto lender Celsius to freeze withdrawals earlier this week.
According to MPI’s analysis, the EurekahedgeCryptocurrencyIndex tracks with Bitcoin almost in lock steps. At first glance, this shows that investing in a cryptocurrency hedge fund can yield similar returns for a single token-at a higher fee.
But if you dig deeper, you’ll see that there is a lot of variability between the best-performing funds and the worst-performing funds, and there are other benefits for investors.
MPI used a dataset of 51 hedge funds. These funds have been included in either the Eureka Hedge or the HFR Universe, dating back at least three years. This number is less than the total number of crypto hedge funds as MPI has excluded new entrants and single coin index funds.
Since 2018, the minimum variance between the highest and lowest performance quartiles has been 39%. The best? Almost 200 percent. Analysis shows that the diversification between these funds is even higher than the diversification of private equity firms.
MPI excluded the top 5 percent and bottom 5 percent of returners in this analysis to rule out outliers.
“The spread is really wide,” Markov said. “It doesn’t make sense to just invest in the average amount of money. We see this crazy diversification. Where to invest is very important.”
According to Marenda, the variability in performance has led to a growing focus on manager analysis.
“Whenever there is this level of variance, it’s when you can make huge profits from the diligence and choice of good managers,” Marenda said. “Cryptocurrencies require the diligence and choice of really good managers.”
Marenda added that the recent cryptocurrency crash has revealed to investors that these funds are taking a different approach to risk management. “Some funds closed their positions in Luna in December when they began to get hints that the funds weren’t sustainable,” he said. “Other funds sold some of their positions in the first quarter. Others put it on the ground.”
To dig deeper into risk and volatility, MPI has created three equally weighted sample portfolios of 10 hedge funds. The first is sorted by the one with the most attractive Sortino ratio (a variation of the Sharpe ratio, including only the standard deviation of the downside), the second is the total return and the third is the operation. Sorted by asset.
The data show that in the three years beginning May 2019, those with the most attractive sortino ratios slightly outperformed Bitcoin, significantly reducing the annual semi-standard deviation. According to the data, the annual semi-standard deviation of Bitcoin was about 37% per year, compared to about 10% in the Sortino Ratio portfolio.
MPI used the Sortino ratio because it wanted to measure only the downside risk, but the Sharpe ratio is important here as well.
“These are high Sharpe ratio opportunities,” Marenda said, estimating that for some of these funds, the ratio is two or three. The Sharpe ratio is measured by subtracting the risk-free rate (market beta) from the portfolio returns and dividing it by the standard deviation of the excess returns. A Sharpe ratio of 0 means that the portfolio beta is the same as the entire market.
Beyond these ratios, MPI’s sample portfolio reveals that investing in a hedge fund structure is less volatile than investing directly in Bitcoin, even for the top 10 returners and the 10 largest funds. Did. Even the HFR Blockchain Composite and the Eurekahedge Cryptocurrency index showed lower volatility.
“It’s just comfort,” Markov said. “The value of arbitrage, hedging and diversification in the field should give investors some peace of mind.”