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What is a Hedge Fund and its relationship with Crypto
What is a Hedge Fund and its relationship with Crypto
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What is a Hedge Fund and its relationship with Crypto

By Fabio Lugano - 21 Sep 2018

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Hedge funds bring together many financial operators with an extremely wide range of investments and are characterized by a very flexible regulatory structure, but with a rather risky management of capital.

The name derives from its objective: to achieve a return regardless of market trends, so the operator is extremely dynamic and there is no hesitation in leveraging or selling short assets.

In general, if you have to indicate the general characteristics of a hedge fund, you can say that:

  • They are only available to qualified investors who have a rather high minimum wealth, assets over one million dollars and annual income over 200 thousand dollars;
  • They have a wide investment horizon: there are hedge funds on real estate, others that operate on listed shares, others on start-ups, on FX, or on cryptocurrencies;
  • They can make leveraged investments;
  • The fee structure is different from that of ordinary investment funds and often involves high performance fees. The basic scheme “2 and 20” is usually mentioned, where 2% is the fee on the invested capital, while 20% is the performance fee on the profit, but if it can be even higher.

From the legal point of view, the USA is a paradise for this type of financial tool.

Control standards are much less strict than those of mutual funds and pension funds, but there is still a general supervision because the clients are qualified, knowledgeable and careful investors.

However, the SEC has very specific regulations related to the need for registration, solicitation to the public, report on services, etc…

There are cases, even very recent ones, of “Cease and desist” orders, in which it was ordered to cease the activity of some funds and to return the money to the investors.

Hedge Fund and Crypto

In any case, hedge funds seem to be the ideal tool to allow qualified investors or professionals to enter the virtual currency sector: in fact, the use of leverage, the possibility of short selling, of having great freedom in the selection of investment projects and of having managers technically well prepared make it a flexible tool, which is also focused on individual aspects of the sector.

There are now funds that manage hundreds of millions of dollars, some focused on trading, some on arbitrage, others on the strategic selection of projects and others on ICOs.

  • Panthera Capital, with 700 million managed, is mainly focused on startups and venture capital, with two separate VC funds and five funds on cryptocurrencies;
  • Polychain Capital actively invests in blockchain initiatives;
  • CoinCapital, based in New York, invests mainly in ICOs and startups;
  • Bitcoin Reserve works mainly as an arbitrage tool for cryptocurrencies on various exchanges, even with OTC transactions, operating both automatically and with human operators, on exchanges such as Huobi, Okcoin and Bitstamp;
  • Binary Financial focuses on investments related to cryptocurrency and mining services. Among its activities there’s BitGo;
  • Bitspread is a fund essentially linked to quantitative trading, i.e. trading based on quantitative analysis, with strategies that seek to generate a profit regardless of the market itself.

Hedge funds have become an almost essential tool for the entry of conscious investors into the cryptocurrency world. These tools are becoming increasingly popular, both with traders and venture capitalists.

Their ability is to combine operational elasticity with a simple regulatory framework that makes them a more secure way to invest compared to directly participating in ICOs.

As we have seen, the SEC also oversees hedge funds, and in the past has had no hesitation in closing some based on non-transparent virtual currencies, as recently happened to Crypto Asset Management LP.

Fabio Lugano
Fabio Lugano

Graduated with honors from Bocconi University, Fabio is a consultant for companies and wounded shareholders of the Banche Venete. He is also the author of "Scenari Economici", and lecturer and analyst of cryptocurrencies since 2016.

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