From a 2018 low point, of just over $100 billion total market capitalization over the weekend, cryptocurrencies have rebounded nearly 14% to Tuesday's highs. Image: iStock
Image: iStock

Where can you protect and grow your money during these turbulent times? 

Investors are contemplating this question while coming to terms with the impact of the global pandemic. Capital markets are risky and interest rates are so low that cash savings can’t keep up with inflation. There’s also speculation that an increasing number of banks will start charging customers for their deposits, which will further erode the value of savings. 

What is there left to turn to if you want to invest safely and enjoy good returns?  

The answer could be cryptocurrency hedge funds profiting from the volatility of crypto assets. 

Over the years crypto has faced a lot of scepticism – and this is understandable. Most of the headlines we read about crypto assets are surrounded by security breaches and volatility. 

But since the birth of bitcoin over a decade ago, the crypto assets trading eco-system has matured and grown in popularity. 

The total market cap for all cryptocurrencies stands at nearly $400 billion, with much of this value attributed to the activities of individual traders buying and selling their own crypto money. Yet a sizable chunk is also the result of big investment funds that manage crypto assets over $2 billion or upwards.

Investors that are open enough to take on this alternative investment opportunity are riding on the volatility of the crypto market and profiting from it.  

This might come as a surprise as the idea of making long-term gains in a turbulent environment looks sketchy at best. But it’s not only happening now, but happening on a very big scale – with some hedge funds actually achieving stable, sustainable returns in an uncertain and turbulent crypto market – the most volatile asset class of all – even during Covid-19.

$2 billion industry

Findings from a recent PWC report revealed that the number of crypto hedge funds continue to rise. The total assets under management worldwide doubled from 2018 to the end of 2019 to $2 billion, and this number is expected to triple by the end of this year. 

These crypto funds come in all shapes and sizes – but those that focus on the art of quantitative trading continue to stand out in terms of performance and returns. 

Quantitative trading

Quantitative trading, also known as “quant trading” or “quant” – is an extremely sophisticated market strategy that has been around for over 30 years. It uses mathematical algorithms and statistical models to identify – and execute – the best automated trade opportunities. 

The risk of this strategy in crypto – which is also used for capital markets – is lower than people think due to the advanced eco-system (Fidelity providing a custody solution, for example) and the returns are high. Quant traders are the super brains of the finance world, highly trained and experienced specialist bankers that are often educated to PhD level in engineering, maths or sciences – and armed with degrees from the top universities.  

Inclusive investment

The world’s biggest proprietary trading firms also use quantitative trading – proof that there’s money to make – and many top fund managers leave these successful prop shops to launch their own funds, taking their expertise with them. 

Of course, the downside to the prop shops for an external investor is that they don’t allow you to reap the benefits of their investment – they only trade with their own money and a couple of investors, who are usually bought out over time. It’s what we call a “closed shop” and not available to family offices.  

Fortunately, there are some alternatives out there to invest in this method of quant trading – and with all the rewards of a prop shop. 

You just need to know how to pick the right one, which is not a simple task in such a new, sophisticated and dynamic asset class. Right now, the target client base for hedge funds is high-net-worth individuals and family offices. But over time, as crypto continues to grow and evolve, more and more investors of different economic means will be able to access this opportunity – perhaps not through a hedge fund, but through traditional financial services, as more banks are encouraged to embrace cryptocurrency

In the meantime, for those who can take advantage of this new asset class, it’s important to address why some crypto funds do well – and others don’t

The global pandemic put the nail in the coffin for many of them in March when the crypto markets plunged. That was when the price of bitcoin dropped by more than $3,000, following a period of relative stability compared to the US stock market. The Dow Jones Industrial Average had been free-falling since the start of the month.

Understanding Fund of Funds

Fund of Funds (FoF) allows diversification by investing in a basket of funds. This diversified approach makes a lot of sense to reduce risk in a new volatile asset class. More so in a new asset class when the source of Alpha keeps on changing and it takes an effort to create a pipeline of managers. 

As asset class experts, FoF not only decreases risk, but also enjoy better terms, liquidity and notices.

Education is key

Cryptocurrency is offering a once in a decade opportunity for investors to see some great returns, but so little effort is placed on providing the education investors need to feel comfortable in this uncharted territory.

Crypto assets, and the trading ecosystem around it, are still very new, and constantly evolving. It would be very hard for someone that is not fully committed to it to be on top of the trends and solutions.

You wouldn’t buy a car if you don’t know how to drive. So why would you invest in a fund if you didn’t know how it worked, and those that operated it weren’t giving you all the facts?

From a risk mitigation point of view, the industry is also progressing very quickly. A few years ago there were no custody solutions. Now custody companies are working steadily on custody on the exchange and the fund together, which would create a very robust solution. Even Fidelity – one of the biggest names in American banking – has one. This is a big sign that the old world of finance is taking crypto seriously – and so should investors.  That’s why the industry has to ensure that investors are always informed of these kinds of advancements to feel comfortable about investments. 

World leading investment 

It’s time for more investors to get in on the action and to learn how to reap the rewards of digital assets. But they must be prepared before they take the plunge, or risk drowning in a sea of uncertainty and risk. 

Yuval Reisman is the CEO of YRD Capital.