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EY: one in four hedge fund managers plan to invest in crypto

Author: ICAEW Insights

Published: 01 Dec 2021

Both traditional and alternative investors plan to explore cryptocurrency investing over the next few years, according to an EY survey, but some are still put off from entering the market by a range of factors.

According to EY’s 2021 Global Alternative Fund Survey, 31% of hedge fund managers, 24% of alternative investors and 13% of private equity managers said they planned to add cryptocurrency to their portfolios in the next one to two years. The purpose of the survey is to record the views and opinions of alternative fund managers and institutional investors globally.

The largest managers were most likely to increase their exposure, with 36% of hedge fund managers with over $10bn, and 32% of managers with $2bn to $10bn reporting they expect to increase their crypto investments.

The earliest days of cryptocurrencies were marked by challenges of self-custody and a limited market, but those have started to fade, according to the survey results. With some risk mitigation now in place, there is a willingness for other institutions to look at digital assets as an alternative option for investment purposes or treasury management. With another 2,000 different digital asset types currently, various investment opportunities exist.

Factors preventing investors from adding crypto to their portfolio

When asked about the top three factors preventing them from investing in crypto-related assets, 61% of managers surveyed reported ‘crypto not fitting into their investment strategy’ as the number one factor.

They also pointed to additional challenges, such as uncertain regulatory treatment of cryptocurrencies (9%), high volatility (2%), ESG concerns (2%) and immature market structure (3%), but these tend to be secondary and tertiary concerns.

In addition, investors placed volatility (14%), regulatory uncertainty (18%) and alignment (29%) at the top of their list of risks. But as market infrastructure evolves, exchanges become more established and investors are more comfortable with asset custody solutions, more institutional investors are expected to become active and gradually increase their crypto exposure.

The year 2021 saw increases in crypto investment activity, despite cautious investors

The survey also revealed that only a small number of the managers EY interviewed reported they have exposure to crypto markets, with 10% of the hedge fund managers and just 4% of the private equity managers reporting crypto allocations.

The managers interviewed generally offer more traditional alternative strategies, and among those that do have exposure in crypto as part of their overall portfolio, assets under management dedicated to cryptocurrency remain small, at one to two percent for hedge fund managers.

However, managers allocating funds to cryptocurrency have a variety of ways to achieve their exposure beyond investing in them directly. This includes investing in crypto derivatives, listed funds and investing in companies with exposure to crypto markets.

Current allocations from alternative managers remain small but are growing. Opportunities exist for those managers who are developing an understanding of this newer asset class.

Click here for EY’s 2021 Global Alternative Fund Survey.

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