After facing a strong crypto winter in 2022 following the collapse of Three Arrows Capital (3AC), crypto hedge funds are making a comeback. Crypto hedge funds demonstrated a notable recovery, posting an average return of 44% by December 20, bouncing back from a 52% loss in 2022, according to a Bloomberg index monitoring their performance.

Although this performance marked the best among 29 tracked strategies by Bloomberg, it lagged behind Bitcoin’s 2023 gain by approximately 120 percentage points. The index also fell short of passive crypto funds, which recorded an average return of around 265% in the past year, as per mid-December data from CoinShares.

Survival in the crypto hedge fund landscape, which faced challenges such as the collapse of FTX, was a significant accomplishment. Of the 712 tracked crypto hedge-fund firms by Galaxy Digital’s VisionTrack, around 250 shut down over the past year and a half. Galois Capital, known for its stance against the Luna token before its 2022 collapse, closed its flagship fund this year, with almost half its assets entangled with the bankrupt FTX.

Bailey York, tracking crypto hedge fund data at Galaxy’s VisionTrack, noted a shift in the industry dynamics. Firms that struggled in 2022 experienced substantial redemptions in the first half of the year. However, this trend began to reverse in the second half, coinciding with the rebound in crypto markets, partly driven by the anticipation of the US approving its first spot Bitcoin ETFs.

Grayscale Investments LLC’s legal victory in August for its Bitcoin ETF push was a significant development. Fundraising for active funds saw an uptick, and new fund managers entered the market, particularly in global financial hubs like Singapore, Hong Kong, Dubai, London, and Switzerland.

Gearing Up for a Strong 2024

Pantera Capital, led by Dan Morehead, a stalwart in the crypto industry, witnessed a remarkable turnaround for its liquid-token fund. As of mid-December, the fund surged nearly 80% this year, rebounding from an 80% decline in 2022, according to a source familiar with the fund’s performance.

Another success story in the crypto hedge fund space is Chainview Capital, managed by 31-year-old Dan Slavin, which doubled its performance after an 18% decline in the previous year. He said:

“In a lot of ways it was kind of a dream year. It’s looking like there’s going to be another token mania coming.”

Stoka Global LP, focusing primarily on alternative coins (altcoins), recorded an impressive gain of 268% as of November 30. Founded by Naveen Choudary, who initiated his career in tech investment banking at Goldman Sachs Group Inc, the fund showcased the potential of altcoins in generating substantial returns.

While the average performance of crypto funds did not match the more than 150% rally in Bitcoin this year, the positive shift in fortunes is a promising development for an industry still recovering from the collapse of FTX in the previous year.

FTX’s failure, coupled with a surge in redemptions and challenges in accessing banking services, led to the demise of approximately one-third of all crypto hedge funds. The surviving firms are now optimistic about a robust performance in 2024, fueled by the heightened price of Bitcoin. There is widespread anticipation that the US will approve exchange-traded funds directly investing in the original crypto token, contributing to the positive outlook for the industry.

Hedge Funds Focus on Altcoins

Pantera Capital’s liquid-token fund is gearing up for an optimistic trajectory in the coming year, focusing on altcoins – tokens excluding Bitcoin and Ether. This strategic shift aligns with the historical outperformance of altcoins in the latter stages of a market rally, following the upward trend of Bitcoin. In an interview, Cosmo Jiang, a portfolio manager at Pantera, emphasized the potential for strong performance among altcoins in the upcoming market conditions.

Among the fund’s significant holdings is dYdX, the token associated with the decentralized crypto exchange of the same name. Notably, Bitcoin and Ether collectively constitute less than 40% of the fund’s portfolio, as highlighted by Jiang, showcasing a diversified approach to capitalize on the potential of various altcoins in the evolving crypto landscape.