Understanding the Different Types of Crypto Hedge Funds
A hedge fund is different from traditional investments such as mutual funds because fund managers enjoy more freedom to use a vast range of strategies in order to lower risks. Cryptocurrencies have started generating excellent profits for some over the last few years. As a result, there has been a growth of crypto hedge funds, a range of professionally managed mid-term and long-term investments that trade in various crypto assets.
Current Bitcoin price has skyrocketed and BTC has been instrumental in elevating crypto markets to more than $800 billion. It is hard to turn a blind eye to such amazing returns. Hedge fund managers and former hedge fund managers are being interested in Bitcoin more, if they were not before.
How do crypto hedge funds work?
Hedge fund managers usually incorporate two investment approaches: systemic and discretionary. In the discretionary approach, important decisions are left in the hands of the fund manager, and the systemic approach involves the use of computer models for trades. Systemic investments are considered safer with low risks because it lacks human emotion, but statistics show that most crypto hedge funds opt for the discretionary approach as those funds have outperformed systemic in the last few years.
Types of crypto hedge funds are:
- Forex Trading Strategy or FX
Forex trading strategy is a technique that is employed by a forex trader to decide if they need to buy or sell a currency pair at a specific time. These strategies can be based on fundamental or technical analysis, or on news-based events like FX Market News, for instance. The trader’s currency trading strategy is generally made up with trading signals that can trigger buy or sell decisions. You can develop a forex trading strategy yourself or go for those that are available on the internet.
- Fund of funds
Fund of funds is an investment strategy to hold a portfolio of other investment funds instead of investing in stocks, securities, or bonds directly. This type of investing is often referred to as multi-manager investment.
- Discretionary long only fund
Long-only funds take long positions only and do not get involved in short-selling. These funds with longer lock-up periods invest in new cryptocurrencies mostly that have growth potential and high liquidity. Singapore based Astronaut capital is a fund of this type. It concentrates on ICOs and has its own tradable token ASTRO.
- Discretionary long/short fund
The hedge fund uses various strategies to increase returns. It invests in coins going up as well as going down. This strategy makes the best use of market movements. Everything is an investment opportunity, from event-driven price changes to technical analysis, and mining. An ex-journalist Alfred Winslow Jones created the hedge fund in 1949 when he was working for Fortune. He looked for a more flexible style of investment. He started to combine two trades by selecting two similar competing stocks that were expected to go in opposite directions. He “shorted” the one he expected to go down and “longed” the one that may go up. The concept is simple. There is going to be winners and losers always, so one could try and take advantage with both.
- Multi strategy
Multi-strategy funds engage in various investment strategies. The diversification benefits help to smooth returns, lower volatility and reduce asset-class and single-strategy risks. Strategies adopted in a multi-strategy fund may include convertible bond arbitrage, statistical arbitrage, merger arbitrage, and long or short equity.
Quantitative strategies are usually run by highly educated teams. They use proprietary models to increase their ability in order to beat the market. There are also off-the-shelf programs that are plug-and-play for those who want simplicity in fund management. Quantitative models always work well when they are back tested. However, the actual application rate and success rate of these models are debatable. They seem fine while working in bull markets, but they are as risky as any other strategy when markets go haywire.
Arbitrage is a strategy to take benefit of price differences in different markets for the same instrument. There should be a situation or at least two equivalent assets that differ in prices for an arbitrage to take place. In essence, arbitrage is a situation where traders can profit from the imbalance of asset prices in different markets.
With so many types of crypto hedge funds, make sure to assess the risk involved before you decide to invest in one.
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