The study also revealed a shift in how hedge funds gain exposure to digital currencies, with a greater reliance on derivatives instead of direct spot trading.
“This trend indicates a more sophisticated approach to navigating the crypto market by hedge funds,” the report stated.
According to the findings, market-neutral and discretionary long-only strategies are the most common choices among established hedge funds.
“Market-neutral approaches are generally favored because they offer a way to control risk while aiming for profits within the volatile digital asset landscape,” the report explained. “While discretionary long-only strategies lack the risk mitigation of market-neutral portfolios, they provide opportunities to profit from the growth potential of cutting-edge blockchain initiatives or digital tokens.”
Quantitative long/short and quantitative long-only strategies are also being utilized by investment firms.
Furthermore, the report highlighted that hedge funds are observing increasing demand for crypto asset exposure from their institutional clients, regardless of whether the funds currently invest in cryptocurrencies.
“The insights from this year’s report suggest a gradual return of confidence over the past year. Renewed interest from institutional investors is being fueled by factors such as greater regulatory clarity – like the European Union’s MiCA regulation – advancements in infrastructure, and the approval of spot Bitcoin and Ether ETFs by regulators in the United States,” stated James Delaney, a managing director overseeing asset management regulation at AIMA, in a press release.
AIMA also reported that about one-third of funds already involved in the crypto market are considering expanding their positions before the end of 2024.
Concurrently, most funds currently avoiding crypto investments are not planning to change course. The report indicated that 76% of these funds are unlikely to enter the crypto market within the next three years, a significant increase from 54% in the previous year.
The report pinpointed investment mandates that specifically exclude digital assets as the primary reason funds are hesitant to enter the crypto market.
Other obstacles hindering broader adoption include regulatory uncertainty, concerns about malicious actors, the potential impact of quantum computing, custodial challenges, restaking complexities, political and governmental influences, and underlying protocol design issues.
The findings were derived from a survey of 100 hedge funds, encompassing both traditional and crypto-focused funds, managing an estimated total of US$124.5 billion in assets.