Are the good times over? That’s the question on the mind of many cryptocurrency hedge fund managers.
Bitcoin’s phenomenal thirteenfold rise in 2017 helped these firms provide astronomical returns for their clients. Data from an index of 17 hedge funds reveals an almost 3,000% rise in 2017.
By comparison, the average return of the worldwide hedge fund industry was 8.7%. Unprecedented returns should be cause for celebration, yet some fund managers in 2018 are giving pause, according to The Wall Street Journal.
“You need to sit down and put a towel on your head and have a think about things,” said Lee Robinson, founder of Altana Wealth, whose fund returned 1,500% in 2017. Robinson says he saw red flags when the time taken for cryptocurrencies to double was cut in half late last year.
Many hedge funds adopted a conservative buy-and-hold strategy. Given the upswing in Bitcoin prices in 2017, this approach worked very well.
However, some managers are now skeptical that the rise of cryptocurrencies will continue unabated in 2018.
Lewis Fellas, head of Bletchley Park Asset Management, has turned cautious on cryptocurrencies and is only 50% invested, down from 90% last year, he says. “The market was looking pretty stretched across most coins,” Fellas said.
Given the recent turbulence in the cryptocurrency markets, some managers have questioned the wisdom of investing in the increasingly speculative Bitcoin market.
These concerns have been tempered for some managers by the introduction of Bitcoin futures market late last year. A position in futures can make it easier to bet on falling as well as rising prices.
Recent data from the Commodity Futures Trading Commission shows that four times as many hedge funds have taken short positions in bitcoin, meaning they are betting on price declines.
The question now is when will the irrational exuberance end?
Beating the stock market by investing in Bitcoin in 2017 wasn’t very difficult, but it has been getting increasingly hard to repeat that run.
The hedge fund industry has had a difficult time the past few years justifying exorbitant management fees while offering weak performance. By providing mind-boggling profits for their clients, the heady returns realized in 2017 was viewed as manna from heaven.
Funds may be equipped to play both the bullish and bear sides of bitcoin trades, yet professional hedge fund managers are not immune from the unpredictability of the crypto market.
The value of a fund that uses leverage can decline precipitously if a trade goes bad. Many funds realize that even though they can straddle both sides, the volatility of bitcoin price movements can still expose them to serious risk.
For instance, frenetic trading saw Ripple lose 60% in 10 days and Litecoin 35%. Bitcoin’s 30-day volatility is going up, presenting investment risks from which professional managers are not invulnerable.
The price of Bitcoin has dropped precipitously in recent days as well, largely on headlines reporting stronger regulations by U.S. authorities, as well as questions about offshore trading platforms with little or no transparency.
The reality in 2018 is that wild and unpredictable percentage swings in the Bitcoin market may swamp even the most sophisticated hedging strategies, making the pursuit of quick profits elusive.
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