Crypto-Currency Hedge Fund Gains 83.86% in April, Though New Bitcoin Futures Slashed Wild Market Speculation
Gene J. Koprowski
Gene Koprowski is a writer/producer who covers the technology industry, and earned an Emmy Award Nomination for his interactive TV writing for Fox News Channel. He also has received an Associated Press Investigative Reporting Award for his reportage.He's also written for Forbes ASAP, The Wall Street Journal Interactive, Investor's Business Daily, Wired.com, and produced a weekly technology news show for PBS-TV, called TechnoPolitics, from Washington D.C.
A well-known crypto-currency hedge fund index which tracks seven funds gained 83.86% for April, its first positive month of the year, according to Eurekahedge, the Singapore-based research and data firm.
The April performance was the best monthly return for the fund since November 2013, based on the surge in altcoin prices. Ether, the second largest cryptocurrency by market cap, rose 69.4% in April and Bitcoin Cash added 101%.
The index is an equally weighted index of seven constituent funds.
The Eurekahedge Crypto-Currency Fund Index tracks the performance of these actively managed ‘Alternative-Coin’ funds that carry exposure to Bitcoin, Ethereum, and other crypto-currencies.
One of the leading firms in the index fund, Pantera Capital had a marvelous month. The $1 billion crypto-hedge fund has approximately 10% of its investment portfolio in Bitcoin.
The hedge fund’s Digital Asset Fund, which was launched in November and includes a number of different virtual currencies, surged 46% last month, compared with a 31% gain registered by the biggest digital coin itself.
A “dynamic trading” environment is responsible for the strong performance, a top executive said in a letter to investors yesterday.
“As we improve our order execution, our slippage and market impact will decrease and so will our time to put new positions on, which should substantially improve performance even further,” the fund founded by Dan Morehead said in the letter.
The Menlo Park, California-based firm’s Digital Asset Fund previously posted three straight months of losses as Bitcoin and other digital currencies pulled back astronomical gains from late last year.
The Federal Reserve Bank of San Francisco blames crypto-currency futures for the market troubles late last year.
Bitcoin Futures to Blame
The introduction of Bitcoin futures gave investors an accessible, and liquid, route to bet against the price of the number one crypt-currency. But they “played a significant role” in the crypto-currency price decline in late 2017 into early 2018, the Federal Reserve’s San Francisco regional bank said in a letter.
In the May 7 letter from the Fed, economists there conclude that the introduction of a financial instrument that enables speculators to bet against something can lead to the decline in the price of the underlying asset. Economists compared Bitcoin futures with the securitization of bonds in the early 2000s.
“The subsequent bust was driven by the creation of instruments that allowed pessimistic investors to bet against the housing market years ago,” wrote the Federal Reserve Bank of San Francisco economists.
“Similarly, the advent of blockchain introduced a new financial instrument, Bitcoin, which optimistic investors bid up, until the launch of Bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the Bitcoin price dynamics,” the Fed’s economists said in the note.
For example, on Dec. 17, the CME Group Inc. became the second exchange behind the Cboe Global Markets Inc. to list Bitcoin BTCUSD, +0.05% futures, which coincided with the all-time high in the price of Bitcoin.
Trading Strategies Differ
The constituents for the crypto-currency hedge fund index engage a variety of trading strategies to profit off the price movements in the underlying crypto-currencies, including but not limited to arbitrage, event driven (regulatory driven), momentum as well as shorting on a limited scale given the liquidity constraints.
As with other alternative strategies, the overall objective is to capture some of the upside while minimizing losses on the downside to maximize returns to the crypto-currency strategy from actively timing the market.
Since bottoming out at under $6,000 on Feb. 6, the price of Bitcoin has risen more than 60%, trading at just over $9,300 yesterday, according to the Kraken exchange. The introduction of Bitcoin futures ended the “one-sided, speculative demand,” according to the Fed report by economists Galina Hale, Arvind Krishnamurthy, and Marianna Kudlayak.
