Additionally, the research found that hedge funds are increasingly using derivatives to gain exposure to cryptocurrencies and are moving away from spot trading.
“This speaks to an increasing sophistication of hedge fund strategies,” he said.
The most popular strategies among traditional hedge funds include market-neutral and long-term discretionary strategies, the report notes.
“Market-neutral strategies are often favored due to their ability to manage risk while seeking returns in the fluctuating digital asset market,” the report said. “While long-only discretionary strategies lack the volatility-mitigating characteristics of market-neutral portfolios, they can capitalize on the upside potential of innovative blockchain projects or tokens.”
The funds also use quantitative long/short and quantitative long-only strategies.
Additionally, the report states that hedge funds are reporting that there is growing demand from institutional clients for crypto exposures, whether the funds already invest in crypto or not.
“The findings of this year’s report indicate a steady recovery in confidence over the past year. Institutional investors are showing renewed interest, driven by several key factors, including clearer regulation, such as the European Union’s Markets in Crypto-Asset (MiCA) Regulation, infrastructure advancements and approval of new products such as Bitcoin and Ether spot ETFs by the U.S. Securities and Exchange Commission,” James Delaney, managing director of asset management regulation at AIMA, said in a statement.
Among funds already exposed to cryptocurrencies, around a third plan to increase these exposures by the end of 2024, AIMA said.
At the same time, most funds that are not exposed to cryptocurrencies do not consider entering this sector. The report says 76% of these funds say they are unlikely to enter this sector in the next three years, up from 54% last year.
For funds that do not invest in crypto, the main barrier to their involvement lies in investment mandates that explicitly exclude digital assets, the report said.
Other barriers to growth include regulatory uncertainty, bad actors, quantum computing, custody issues, retaking, political/governmental bans, and protocol design.
The report is based on a survey of 100 hedge funds, both traditional hedge funds and crypto-focused funds, with an estimated total of $124.5 billion in assets under management.
