Investors would have benefited more from buying and holding bitcoin (BTC) than investing in crypto hedge funds during the first half of 2023, according to a research report from Swiss-based crypto investment adviser 21e6 Capital.
Crypto funds returned an average of 15% during the period versus an 83% gain for bitcoin, according to 21e6 Capital data provided to Bloomberg. Funds with directional strategies returned an average of 22%, well below bitcoin but above the 6.8% return on market-neutral strategies that often attempt to follow market trends, a difficult proposition in choppy markets.
The funds struggled against the sudden closure of multibillion-dollar crypto exchange FTX in November, the closure of three crypto-friendly banks earlier this year and the continued turbulence around potential regulations.
“It is plain to see that a simple buy-and-hold investment into bitcoin would have outperformed all of these fund baskets. Bitcoin added about 80% in value by the half of the year,” wrote 21e6 Capital due diligence manager Jan Spörer and sales and marketing head Maximilian Bruckner in the report. “In previous bull runs, crypto hedge funds were frequently able to significantly outperform the bitcoin benchmark. How can underperformance among professionally managed crypto funds be such a widespread phenomenon?”
The complex answer involves the fact that crypto hedge funds went into the year with larger than typical cash positions to help mitigate risks after the collapse of FTX, which made reaction times slower. The underperformance of altcoins – or cryptocurrencies not named bitcoin or ether – also took a toll on hedge funds.
21e6 Capital tracks more than 700 crypto funds globally and tracks the regulatory performance reports of 123 funds across 70 firms. The underperformance has led to the closure of about 97, or 13%, of those crypto hedge funds, according to the Bloomberg data. One example was crypto investment firm Galois Capital, which announced its closure in February due to its heavy exposure to FTX. Other hedge funds shut down underperforming funds.
