Investing in bitcoins? Beware, hedge funds are growing wary of crypto mania

Their caution is the latest sign of doubt among investors that the red-hot rise of bitcoin and its ilk is sustainable

Hedge funds that rode the wave as cryptocurrencies surged last year have turned cautious, the latest sign of doubt among investors that the red-hot rise of bitcoin and its ilk can be sustained. 

Bitcoin's more than thirteen-fold rise in 2017 helped fuel a stellar year for the still-small number of hedge funds dedicated to cryptocurrency investing. An index of around 17 cryptocurrency hedge funds from data provider Hedge Fund Research Inc rose almost 3,000 per cent in 2017 — light years ahead of the 8.7 per cent average return across the global hedge fund industry.

Several crypto-focused funds now say it's time for a break.

"You need to sit down and put a towel on your head and have a think about things," said Lee Robinson, founder of Monaco-based hedge fund firm Altana Wealth, whose $45 million cryptocurrency fund returned around 1,500 per cent last year.

Mr Robinson said he became concerned when the time taken for the price of cryptocurrencies to double was halving late last year — a sign the market was overheated.

He said the fund is now positioned to profit from price falls on stocks associated with bitcoin and blockchain technology, and cut back its bet on rising cryptocurrency prices.

The change of heart among investors like Mr Robinson has coincided with other factors now buffeting bitcoin's fortunes. Financial regulators have grown concerned about the bubbly prices of cryptocurrencies and their association with illegal activity, particularly in Asia, where much of the world's trading in bitcoin and its peers takes place.

The price of bitcoin fell to $10,525.27 on Tuesday according to news and research site Coindesk, down from a peak of $19,283 on December 16. It started 2017 at just $892.

Few cryptocurrency funds have established much of a track record and many private banks have been reluctant to offer them to their clients, said Mohammad Hassan, head of hedge fund research at EurekaHedge in Singapore. Most cryptocurrency funds employ a simple strategy of buying cryptocurrencies, and selling them after they appreciate, he said.

"What they're doing is pure market timing," he added. "For me, the question is, why would anybody pay 20 per cent fees for this?"

But professional fund managers are increasingly interested, as the launch of bitcoin futures markets in the US late last year gave investors concerned about those markets' highly-speculative nature some confidence they're becoming more mainstream. They've also made it easier to bet on falling — not just rising — prices.

Now, some managers are leaving lucrative positions on Wall Street and other financial centres to set up new funds.

Lewis Fellas, a former portfolio manager at Harvard Management Company, which manages the university's endowment, left Boston in 2016 to set up cryptocurrency-focused Bletchley Park Asset Management, based in Hong Kong.

The fund made a 106 per cent return last year, basing its investing decisions on technical analysis of crypto markets and by comparing digital currencies to social networking companies like Facebook and Twitter, which it believes share similar characteristics.

But Mr Fellas said he's turned cautious on cryptocurrencies this year, and is currently 50 per cent invested, down from 90 per cent in December.

"We felt the market was looking pretty stretched across most coins," he added.

Data from the Commodity Futures Trading Commission shows that hedge funds overall entered 2018 betting bitcoin prices would fall outweighed those betting it would rise by a factor of four. As of January 16, such short positions still outnumber those taking the opposite bet, the data shows.

Still, some funds remain bullish. California-based Pantera Capital wrote in a note to clients last month that Bitcoin could rise to $50,000 by 2019, and to a "fair value" of $500,000 in the next 10 years.

It said the currency had "probably" got ahead of itself "but not in an unprecedented way".

As bitcoin's roller-coaster market ride continues, some hedge funds are developing strategies they believe could prove more sustainable than simply betting on rising prices. The growing sophistication of crypto-focused hedge funds is partly a response to scepticism about whether they add much value for their clients.

BitSpread, a Cayman Islands-based cryptocurrency hedge fund, uses an internally-developed algorithm to sniff out variations in the prices at which various digital coins like bitcoin trade on different exchanges. It earned an annualised return of 105.7 per cent in 2017 and has more than $100 million in assets under management, according to a fund factsheet.

The strategy means Bitspread's funds are "always 100 per cent invested", according to its chief executive officer and founder Cedric Jeanson, whose career in banking spanned trading desks at JP Morgan Chase, BNP Paribas, and Nomura.  

Source: The Wall Street Journal