What is a Crypto Hedge Fund?
Okay. Before we start talking aboutcryptohedge funds, we need to, first, understand what a hedge fund is, right?
What Is A Hedge Fund?
A hedge fund is a partnership where private individuals and institutional investors pool money together, and then professional managers handle and invest the funds in a mixture of assets, using different strategies. These assets can range from stocks and bonds to foreign currencies and cryptocurrencies, but the goal of the investment is to maximize and earn high, above-average returns.
Because they are such (potentially) extremely high-return investments, hedge funds are also higher risk than other types of funds and usually require high-minimum investment. Despite the risk level, hedge funds appeal to wealthy investors because their managers have built reputations for impressive results in the private world of hedge fund investing.
Hedge funds are also attractive to investors because you can invest them in any asset with potential for high returns. It is not surprising, therefore, that with the massive returns generated, investors would pull crypto into their hedge fund.
What’s A Crypto Hedge Fund?
A crypto hedge fund is a hedge fund that invests in cryptocurrencies. Beyond buying and selling cryptos, these funds invest in crypto-based products and futures. Others go further to invest in venture capital and private equity for blockchain startups.
Some crypto hedge funds invest solely in crypto and digital assets. Others prefer a mixture of crypto investments and the usual traditional assets – stocks, bonds real estate, derivatives, e.t.c. However, although the latter group has less risk, it is not as profitable as the former.
It’s true that, currently, the amount in crypto funds investment is little compared to that of traditional hedge funds. Also, cryptocurrencies are currently a tiny percentage of the hedge fund industry. However, even the oldest, most traditional funds can predict its rise – with participation exponentially increasing every year. Many millennials and Gen Z-ers now prefer the “no-bank” route, and would rather save their funds in a cryptocurrency exchange. That’s why institutions and industries are forcefully considering cryptocurrency – and the perfect middle ground between the volatile crypto economy and the formal banking experience is hedge funding.
Advantages Of Investing In Crypto Hedge Funds
Is it worth investing in a crypto hedge fund? Oh, sure. A few reasons include:
- Their potential for astoundingly high returns. This is one of the major advantages of this fund. Managers of crypto hedge funds typically employ high-risk/high-return tactics, which can pay off massively. Pantera Capital is a good case study. Starting in June 2021 with a $600 million investment target, the fund is currently at $1.3 billion.
- Expansion – and reduction in excessive reliance on regular hedge funds. Beyond the assets in the traditional hedge fund (which can be quite over-saturated), a crypto hedge fund diversifies your portfolio assets and spreads out your eggs into many baskets – ultimately reducing risk to some extent.
- Management by skilled and expert professionals. Due to the high-risk level involved, crypto fund managers are highly experienced in navigating the volatile world of crypto. They guard the assets of naive investors from the scams and rug pulls the crypto world is known for.
Disadvantages Of Investing
- Restricted access for individuals who aren’t wealthy. The crypto hedge fund is tilted towards the high-worth clientèle. While people can purchase several cryptocurrency funds in any amount through their stock broker, a substantial minimum investment – ranging anywhere from $100,000 to $ 1 million – is required to participate.
- High fees. Crypto hedge funds charge managementandperformance fees. Management fees are typically up to 3% of your investment, and performance fees (which is their percentage charged on your positive investment return) can go as high as 50%!
- The double high-risk potential. The crypto market can be volatile on its own. Hedge fund investing is also typically high-risk. The combination of both can be combustible – and every potential investor must keep this in mind.
However, high risks precede high returns. Investing in a crypto fund hedge can be extremely profitable – especially when supervised by skilled, experienced managers.