Cryptocurrency industry volatility puts hedge funds on the brink

Hedge funds focused on cryptocurrencies were badly hit by the recent major sell-off on the digital assets market. Even though Bitcoin and all major altcoins managed to regain ground after the mid-March collapse, many hedge funds incurred large losses and were forced to close. The industry players picture the situation with dark colors and grave epithets.

According to Edouard Hindi, a partner of hedge fund Tyr Capital, the bloodbath is an understatement in current conditions, even though Tyr is doing better than most of its competitors. 

Crypto funds on average lost 26.2% in March, according to Hedge Fund Research group (HFR), their second-worst monthly loss in data stretching back to 2015 and much greater than the 8.4% average loss suffered by mainstream hedge funds.

In March, cryptocurrency-focused hedge funds lost over 26% on average, the analysis performed by Hedge Fund Research group (HFR) showed. This is the second-worst monthly figure since 2015. 

Pantera, one of the biggest players in the segment with $500 million of assets under management, suffered a 33.6% loss in March. However,  a significant recovery in April brought the profitability to 32.5% this year. 

Dan Morehead, the founder of Pantera Capital, commented as cited by the Financial Times:

“The speed and depth [of the bitcoin sell-off] weren’t what we were expecting. Some futures exchanges offer almost insane amounts of leverage. Bitcoin is such high-octane stuff that putting on any leverage is unnecessary.”
 
Notably, some exchanges offer leveraged trading that raises the potential profits and increases the risks exponentially at the same time. Automatic liquidation of losing positions often exacerbates collapse, making the market particularly treacherous.

While the arrival of institutional players has dampened the risk-taking, the cryptocurrency market still remains more like a Wild West, where price discrepancies between the same assets on different exchanges may be really significant. 

Meanwhile, despite the setback, most of the crypto hedge funds managed to return in the green zone due the sharp recovery in April.