Starting a crypto hedge fund is easy if you have sufficient investment knowledge. A crypto hedge fund is your gateway to trading in the market with substantially high amounts of cryptocurrencies. However, events like the liquidation of Three Arrows Capital, one of the biggest hedge fund managers, highlight the need for due diligence before pulling the trigger.
A lot has changed since the Terra-Luna crash, and clouds of mistrust and uncertainty hover over the crypto market. Therefore, it boils down to survival of the fittest. Starting a crypto hedge fund is all about learning from affluent investors, implementing proven strategies, and reaping benefits.
What Are Crypto Hedge Funds
As the name suggests, a crypto hedge fund is a hedge fund that invests in cryptocurrencies and assets related to the crypto industry. Crypto hedge funds sell comparatively “lesser volatility” to encourage the participation of investors. It is basically a pool where funds from multiple individual and institutional investors are kept and invested in different crypto assets. Professional firms run such funds under the supervision of professional fund managers. Such funds are ideal for people who want to invest in cryptocurrencies but are unable to do market research due to a lack of time.
How Do Crypto Hedge Funds Work
Besides cryptocurrencies, crypto hedge funds also invest in crypto-based derivative products, blockchain startups, and other assets related to the crypto industry. Pantera Capital, Morgan Creek Capital, Brevan Howard, and Polychain Capital are some of the biggest cryptocurrency hedge funds. Different crypto hedge funds have different priorities with respect to investment areas. However, the functionality is more or less the same.
Around 1% to 3% of your investment goes to the hedge fund in the name of maintenance fees. Besides this, you also have to pay a performance fee that depends on the returns of your investment. The performance fee may vary from 10% to 40%. This performance fee is charged on a yearly basis.
Also, you need to invest a certain amount to participate in a crypto hedge fund. For example, your investment size must be $1 million to participate in Pantera’s blockchain fund.
How To Start A Crypto Hedge Fund
First of all, different countries have different rules and regulations regarding the setting up of a crypto hedge fund. It has a lot to do with whether cryptocurrencies are regulated in a particular country or not. Therefore, you must start by researching the crypto regulations in the country/state you seek to start your operations.
For instance, fund managers in the US must register with agencies like SEC and CFTC to start a crypto hedge fund. However, those managing less than $150 million are exempt from registering with government agencies. Secondly, you also need to build connections with large-volume investors to ensure fund availability. These steps will help you set up a reputed hedge fund:
Building A Reputed Brand: The importance of trust in the crypto industry is paramount. Especially after the FTX fiasco, you must focus on enhancing Trust and Reliability before moving to the next step. You can do it by partnering with leading influencers, institutional investors, and exchanges or by adopting other marketing strategies. Suppose a reputed crypto exchange like Binance or a leading traditional hedge fund starts a crypto hedge fund. They will have the edge over a newbie.
Opening Account With A Trusted Crypto Platform: Opening an account with a trusted crypto exchange like Coinbase or Binance makes investing in top cryptocurrencies like Bitcoin, Ethereum, and Cardano easier. Once you open an account with a reputed exchange, you can use your bank account or your credit card to invest in cryptocurrencies. With an exchange involved, attracting more investors becomes way more convenient.
Diversification To Minimize Risk: As a hedge fund manager, you must remain a step ahead of retail investors as you are responsible for the funds of multiple investors. A proven way to do this is by diversifying your investments across multiple exchanges. This ensures that the majority of your funds are secure, even if an event like the FTX fiasco repeats itself.
Have A Strong Strategy In Place: Investment without a solid strategy is often directionless. Set your plans in advance with achievable goals. Collaborate with seasoned investors and financial advisors to prepare for every possible scenario. Gain experience by accessing educational resources to understand how the crypto industry functions.
Pros and Cons Of Crypto Hedge Funds
Before you jump on the bandwagon, you must know about the pros and cons of starting a cryptocurrency hedge fund.
Pros
- Lesser risk of getting rekt by scams and rug pulls as seasoned investors manage the funds.
- Higher profits as the majority of hedge fund managers deploy a low-risk/high-reward strategy.
- Convenient diversification as reputed hedge fund managers collaborate with several reputed crypto platforms.
Cons
- High performance fees. In some cases, investors might have to pay nearly 50% of returns from an investment.
- Limited access as users must have a certain minimum investment amount to participate in the fund.
Bottomline
Crypto hedge funds can be really profitable for large-volume investors and fund managers alike. Undoubtedly, crypto is a high-risk, high-reward industry. But you can go a long way with the right strategies and professional advisors. However, one must be mindful of the risks in the industry while jumping on the bandwagon.