Why Hedge Funds Desperately Need Cryptocurrency

Cryptocurrency investors should smile and kiss the ring of the folks at CNBC.  Without any intent of doing so, they have made an unshakable case for bullish crypto price predictions for 2018 and beyond.  The following headline appeared innocently enough today on the web version of the financial news giant.

 Hedge funds are beating the market for the first time in 10 years

Wow, this is a fact that has passed me by for far too long. Sure, I knew there were more hedge funds in existence and that not every one of these managers could be investment geniuses. And then there was all the news about how hedge funds were lowering their fees and profit participation stakes because returns have been so poor. But thanks to CNBC I now realize what low levels things had reached in hedge fund land. 

All this could spell bad news for property values in The Hamptons just as the summer season is getting started, OMG! Here is how the first four months of 2018 broke down.

Hedge funds were up about 0.4% compared with the S&P 500, which suffered a decline of about 0.4%. No matter how you slice the pizza, that’s pretty crappy performance.  Worst yet, CNBC decided to massage the egos of hedge managers by selecting the S&P 500 when the Nasdaq would have been more appropriate.

The Nasdaq is simply a higher risk index. The S&P 500 is a broad based measure of the general market.  Had the Nasdaq been chosen, the headline and the whole story would have been different. During the first four months of 2018, the Nasdaq has been up 3.6%.

So, What’s The Whole Point?

What CNBC is really highlighting is just how desperate hedge fund managers are looking for performance. The biggest contributors to this year’s run have been healthcare and technology stocks, which combined have netted a 4.54%, the fixed income-asset backed strategies, with a 3.12% gain, and active trading, which has produced a 3.12% return.

In April, though, the big mover was energy and basic materials, which easily outdistanced other indexes with a 4.5% gain according to the article. In other words, thank goodness for April.

Crypto hedge fund assets are a tiny $5 billion slice of a $32 trillion industry. But look at how their April performance turned out. The HFRI Blockchain Composite Index surged 48.5% in April putting both the S&P 500, the Nasdaq and about every other index to shame.

To make matters even more embarrassing, the Eurekahedge Crypto-Currency Hedge Fund Index showed an even more impressive April gain of 84%.

So the headline should have read:  

Cryptocurrencies Had A Better April Than The New York Yankees

Just like CNBC, I cheated just a bit by overlooking the fact the HFRI Crypto Index is off just a smidgen over 17% this year.  Actually, if absolute honesty is the goal and we go back to December, the carnage is far more than 17.5%. At the same time, this is the whole point. Cryptocurrencies, no matter if we are focusing simply on nitcoin, Ethereum, Ripple or one of the bazillion other altcoins, the upside volatility is far greater in crypto than any other asset class.

Hedge fund managers from Wall Street to San Jose are desperate for performance.  They will look at April’s performance and the upside potential. The performance of crypto from December to March will be rationalized as the best investment opportunity for 2018 and beyond.

Now all we need is for some real progress on scaling to provide a bona fide reason to be buying crypto then we will have true convergence of price and value.

Featured image courtesy of Shutterstock. 

Author:
James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.