Since the beginning of 2023, 13% of cryptocurrency hedge funds have closed – 21e6 Capital

Since the beginning of 2023, 97 cryptocurrency hedge funds have closed, according to 21e6 Capital.

This trend is contrary to historical data: usually hedge funds have performed well against the background of the growth of the crypto market.

According to 21e6 Capital, hedge funds are struggling to keep up with the rise in the price of bitcoin (BTC). Directed investment funds that use strategies based on predictable market movements lag behind the main cryptocurrency more than others in terms of profitability. Compared to non-directional funds, they rely more on futures and tend to bet on short-term price fluctuations.

Given the specifics of the cryptocurrency market, directed investment funds bear high risks due to the volatility of digital assets and frequent trend changes.

Of all the investment strategies used by hedge funds, the so-called “quantitative directed” strategy turned out to be the least effective in 2023. It is based on statistical decision making and usually uses trading algorithms.

As noted in a 21e6 Capital report, this approach has become a real headache for fund managers. Since the last year was characterized by market instability, the price movement of crypto assets did not follow previously observed patterns. False signals interfered with trading algorithms, reducing the predictive power of trend-following strategies.

Another challenge for algorithmic trading tactics has been the proliferation of artificial intelligence (AI) generated content. Quantum foundations are adjusting data collection methods to ensure the accuracy and efficiency of their algorithms. This comes amid the growing prevalence of AI-generated misinformation.

The problems that arose as a result of the bankruptcy of the FTX exchange were reflected in the activities of cryptocurrency hedge funds. The consequences of the crisis even led to the closure of some of them.

For example, in February, the Galois Capital fund closed, the assets of which were inaccessible after the collapse of the platform.

However, even those funds that did not suffer significant losses from the collapse of FTX were forced to adapt to new market conditions.

FTX was a well-known cryptocurrency derivatives exchange offering perpetual swaps, futures and options. Since there is currently no clear alternative in the US to take its place, funds heavily dependent on derivatives are being forced to use platforms with lower liquidity.

According to 21e6 Capital, crypto funds experienced difficulties accessing critical banking services throughout the year.

After the crisis provoked by the bankruptcy of FTX, many banks have adjusted their attitude towards the cryptocurrency sector as a whole. Amid increased scrutiny from regulators, banks that were previously friendly to cryptocurrencies have stopped working with hedge funds. This problem only got worse after the collapse of Silicon Valley Bank.

The report notes that "even exceptionally well-performing funds have gone out of business for lack of new banking partners."