Crypto hedge funds gear up for ‘token mania’ after 2023 rebound

CRYPTO hedge funds that survived a bruising 2022 are recovering, and many are thriving. Some are even expecting a banner 2024.

Take Dan Morehead’s Pantera Capital, one of the industry’s oldest and biggest funds. The firm’s liquid-token fund was up nearly 80 per cent this year as at mid-December, after falling 80 per cent in 2022, according to a person familiar with the performance. Chainview Capital, the crypto hedge fund run by 31-year-old Dan Slavin, has doubled after an 18 per cent decline last year, Slavin said. 

Stoka Global, which invests predominately in so-called altcoins, gained 268 per cent this year as at Nov 30, according to founder Naveen Choudary, who started his career in tech investment banking at Goldman Sachs Group. 

While on average, funds have not matched this year’s more-than 150 per cent rally in Bitcoin, the reversal of fortunes is welcome news for an industry left reeling after FTX’s collapse last year.

That failure, combined with a wave of redemptions and difficulty in accessing banking services, contributed to the demise of roughly one-third of all crypto hedge funds. Firms that weathered the storm are now gearing up for an even better 2024, as the price of Bitcoin remains elevated thanks to optimism the US will approve exchange-traded funds that invest directly in the original crypto token. 

“It’s looking like there’s going to be another token mania coming,” Slavin said, adding that the mood in the crypto market this year felt a lot like three years ago, when Bitcoin was on the cusp of a breakout that sent it soaring to record highs. 

As the largest token grinds higher, prospective investors are picking up phone calls from fund managers again and hedging remains cheap. 

“In a lot of ways it was kind of a dream year,” said Slavin. He is looking to hire more traders and other staff, adding to his “two-man show”, he said in an interview from a makeshift workspace in his childhood home near Boston, where he started his fund before moving it to Miami. 

Crypto hedge funds on average returned 44 per cent this year as at Dec 20, rebounding from a loss of 52 per cent in 2022, according to a Bloomberg index tracking their performance. While that is the best among 29 strategies tracked by Bloomberg, it still trailed Bitcoin’s gain for 2023 by about 120 percentage points. The index also underperformed passive crypto funds, which on average posted returns of about 265 per cent in the past year, according to data as of mid-December by CoinShares. 

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Still, survival itself is no small feat. Of the 712 crypto hedge-fund firms tracked by Galaxy Digital’s VisionTrack, about 250 shut over the past year and a half. Galois Capital, best-known for betting against the Luna token before its implosion in 2022, closed its flagship fund this year after it had almost half its assets stuck with bankrupt FTX.

“For firms that have performed poorly in 2022, they saw a lot of redemptions through the first half of the year,” said Bailey York, who tracks crypto hedge fund data at Galaxy’s VisionTrack. 

That started to change in the second half, when crypto markets rebounded in part because investors expect the US to allow its first spot Bitcoin ETFs. Grayscale Investments LLC won a key legal fight in August in its push to launch a Bitcoin ETF. Fundraising for active funds also picked up, and new fund managers have come to market, especially in Singapore, Hong Kong, Dubai, London and Switzerland, York said. 

In November, after FTX founder Sam Bankman-Fried was convicted of fraud in his monthslong trial, there was a “collective sigh of relief”, said Sadie Raney, co-founder and chief executive officer of Seattle-based crypto hedge fund Strix Leviathan. From there, she noticed that interest from prospective investors, such as funds of funds, spiked. 

Pantera Capital’s liquid-token fund hopes it is positioned for a bullish ride next year with altcoins – tokens other than Bitcoin and Ether. That is because altcoins historically outperform in the second part of a market rally, following the rise of Bitcoin, Cosmo Jiang, a portfolio manager at Pantera, said. 

“We may be in the second part of the cycle where token selection actually matters,” Jiang said. “Our LPs go to us for exposure to the crypto landscape and technology as a whole, not just Bitcoin. Our core thesis is, if you believe this industry is going anywhere, there have to be protocols that actually generate revenue.”

One of its biggest positions is dYdX, the token of the eponymous decentralized crypto exchange. Bitcoin and Ether together make up less than 40 per cent of the fund, according to Jiang.

Some funds are moving past the scars brought by FTX’s downfall. Greg Moritz, co-founder and chief operating officer at crypto hedge fund Alt Tab Capital, said his fund had 2 per cent of assets stuck on the platform, and it is in the process of liquidating its claim on the secondary market. 

Alt Tab, which manages about US$21 million, expects the fund to end the year up about 30 per cent, Moritz said, adding that his fund was “cautious” this year. “Now we’re in a position where we are super aggressively positioned for the upcoming bull run,” he said.

Moritz predicted the crypto market will get a boost from a combination of macro and industry-specific factors, including stabilising inflation, the Federal Reserve’s pivot away from rate hikes, and Bitcoin’s halving, which will reduce supply.  

“Overall we feel like this year was the recovery,” Moritz said. “Next year is really to knock it out of the park and celebrate.” BLOOMBERG