Some crypto hedge funds are beating bitcoin while equity funds struggle

Cryptocurrency hedge funds appear to be bucking a broader market trend by delivering outsized returns to their limited partners as equity hedge funds bleed red. 

Typically, hedge funds act as vehicles of capital preservation during times of market uncertainty or chaos – hence the name. In other words, such turmoil is when they are supposed to beat the broader market and indexes. And for the most part, investors in the digital asset market are living up to that moniker. 

Crypto funds performed well during January and February, outperforming bitcoin and other benchmarks, according to one investor who has positions across various hedge funds in the market. The investor, who declined to speak on the record, said crypto fund Pantera outperformed bitcoin during those months. Bitcoin's price rose over 19% during this period.

Paul Veradittakit, who is a venture capital investor at Pantera Capital, confirmed that the firm's Digital Asset Fund is beating bitcoin's performance this year, but declined to share specific numbers. 

Meanwhile, Eric Ervin, the founder of BlockForce Capital, told The Block that his firm's $3.5 million multi-strategy hedge fund, which only just opened up to outside investments, is up more than 6.5% year-to-date.

Brian Kelly's BKCM is up more than 5% since the beginning of the year, according to an investor letter reviewed by The Block. Bitcoin is down nearly18% year-to-date.

As for Polychain — excluding its fund's side pocket and liquid portion — the firm is beating bitcoin's performance in January and February, according to a source.

To be sure, not all funds are doing well.

As previously reported, a crash in bitcoin last week resulted in Adaptive Capital shutting down. Still, there's quite a bit of uncertainty hanging over the crypto fund market. The desire for large LPs to cash out of their riskier crypto positions to set aside cash ahead of a recession could put pressure on funds in the short-term.

And, to be sure, there's no guarantee that March numbers for crypto funds will outperform. 

Speaking to recent volatility, Veradittakit said the firm's active Digital Asset Fund increased exposure to its quant strategy, which goes long and short on different cryptos, over its discretionary strategy, which is mostly long bitcoin.

"As we noticed what was starting to happen with the coronavirus and the macro-environment, we increased our allocation to the quant side ahead of this crash," he said.

Meanwhile, in equities...

Crypto hedge funds appear, at least on the whole, to be bucking a trend in broader markets.

Indeed, Bridgewater Associates, which manages $160 billion, is one notable victim of the coronavirus-linked market turmoil. Per an investor letter reviewed by The Block, the net performance of its "All Weather" and Pure "Alpha Funds" are down on a net basis. Its Pure Alpha (18% vol) fund leads in losses, down ~21%, according to the document.

Still, that beats the year-to-date performance of the S&P 500, which has shed 26%.

"While it's not what I would want, it's consistent with what I would have expected under the circumstances," Ray Dalio, co-founder of the Connecticut-fund, said in a note to investors. 

"The novel coronavirus is a pandemic that came on fast and hit us at the worst possible moment because we had a long tilt in our positions."

Ray's troubles aren't without company. As noted by The Financial Times' Robin Wigglesworth, hedge funds with long positions "have been hammered this week." According to his reporting, Hedge Fund Research's daily index – which tracks the performance of more than 100 large hedge funds – has shed approximately 6.4% this month.

The $35 billion Schonfeld Strategic Advisors recorded double-digital losses in 2020, according to reporting by The Financial Times. 

Underpinning this weak performance is a strong desire on the part of investors to exit from their equity positions into cash. 

As Goldman Sachs noted in a research report out Thursday, investors will continue to "rotate away from equities in the near term, leading equity prices even lower". 

"Money market funds received $153 billion of inflows during the past month compared with $10 billion of combined outflows from stock and bond funds," the firm said. 

Editor's Note: Pantera is an equity investor in The Block.