A hedge fund is an investment in a vast group of essential securities that are governed by a team of professional investors who continuously analyze and rebalance them occasionally. This kind of market manoeuvre brings profit to investors. Presently, the crypto hedge funds are divided into two types: crypto hedge funds and crypto hedge funds. Crypto hedge funds primarily manage cryptocurrency portfolios while the latter deal with a variety of other assets funds as an addition to the crypto dealings. The crypto hedge funds that primarily manage cryptocurrency portfolios have a fundamental role in maximizing returns through the addition of the initial coin offering (ICO’s) into their mix. This further helps to amplify any gains achieved by the ICO. On the other hand, the crypto hedge funds that deal in a variety of additional assets funds tend to be more risk-averse. However, they result in little profits due to the astronomical rise of cryptocurrency. Some hedge fund platforms are suitable for individual investments with a conscientious blend of cryptocurrencies like the crypto copy fund.
As an investor, you can mimic the market by monitoring movements of popular coins like Ethereum, Dash, and Ripple. Even then you should be informed that most crypto exchanges have minimal support for institutional order sizing.
Below are the common issues you need to know in crypto hedge funds before investing.
Lack of Independent Governance
Anyone who has experience with a hedge fund will tell you that corporate governance is of critical importance. A good percentage of crypto hedge funds lack independent governance. This is according to a study published in 2019, by investment company Elwood in collaboration with PWC. The explanation behind this revelation is that independent directors can offer valuable assistance when there’s a need to make discrete decisions like imposing restrictions on investor redemptions. Such an issue might become more evident in crypto-asset dealings that are fickle or generally illiquid.
In a nutshell, lack of proper governance in crypto hedge funds is a factor that is acting to wade off investors. Besides, having a board with independent directors is more likely to offer an accepted fund expense. If crypto hedge funds can be able to concentrate on proper fund governance, more institutional investors will be able to put up their capital in these funds.
There’s Little or No Third-Party Research
One other problem is that there is little or no third party research in crypto hedge fund investments. This makes it clear that there is an existing deficit of external parties who can offer objective inputs. This instance is partly because of the overreliance on ownership oriented valuation models and the fact that most funds opt to do their own research. Additionally, the crypto fund industry is still immature and vulnerable. It can be evidenced by the little or no devoted cryptocurrency research institutions to offer vital insights into the market today.
Professional Team Combination Still at Its Inception
The crypto fund team expertise is still growing with a large number of experienced investors already embracing the crypto market. The existing notion is that the crypto hedge fund should comprise a team endowed with asset management skills. This is because they can advise regulators and investors on how to implement digital asset regulations into their investment portfolios. Aside from that, they can be of importance when creating clear frameworks. Additionally, the crypto hedge fund space is still institutionalizing. So, non-investment professionals whose personnel do not invest in hedge funds but offer valuable service are needed. For instance, a chief operating officer (COO) will advise on the need for investor protection. A Chief Technology officer CTO, on the other hand, will be able to may offer valuable technical expertise for a seamless investment process
Challenges in Evaluation and Administration of the Crypto Fund
It is difficult to evaluate the monetary worth of a crypto fund. This is especially common with funds with illiquid tokens and those that have Simple Agreement for Future Tokens (SAFTs) investments. Another factor making the valuation difficult is that one cannot quickly determine when the evaluation should stop, primarily because the crypto market never sleeps. Another point is that knowing the number or the price estimates is a challenging affair since one crypto asset can be tested differently depending on various global exchanges.
Moreover, there are no fund administrators in the cryptocurrency asset industry since many funds rely on very small fund administrators for their net asset value calculations. As a matter of fact, the net asset value calculations are very vital for the crypto hedge fund investors. Despite the few numbers of fund administrators, there is a more positive outlook in their growth as the industry matures and becomes more institutionalized functionally.
Default Risks by Contract Parties
Akin to the traditional hedge funds, the crypto hedge fund also presents a cryptocurrency risk where parties involved in a transaction may default in their contractual obligations. Hence, counterparty risk is a factor that has to be well articulated in the crypto hedge funds. Depending on the crypto fund investment strategy, whether it is quantitative, fundamental, or discretionary, there are always some complications in their custody process. For instance, in a quantitative fund that is biased towards liquidity and only trades on liquid assets like Ripple. It’s very high trading cycle tends to buck off from the need of a cold storage solution – an offline wallet that stores bitcoins, safeguarding them from hacks and unauthorized access. It is because it has to put all assets on an exchange. As such, default risk tracking becomes essential at such times. It is advisable that any crypto fund strategy that entails putting a considerable amount of assets at the exchanges should implement a proper default risk program that ensures constant monitory. One such countermeasure would be reducing exposure to only one transaction at every point.
The increasing cryptocurrency market cap today is mainly as a result of the colossal crypto hedge investment funds. Emanating from companies that are perceived as the giant in the cryptocurrency community. By and large, the crypto funds, asset management portfolios are driven mostly by demand and the participation of institutional investors. However, before investing in the crypto hedge funds. You should be informed of the common issues in the industry like the lack of independence governance. Since the professional team combination is still at its inception, there are still existing challenges in evaluation and administration of the crypto fund. So, the risk of default by the party to the contract as well as the lack of third party research is still evident.
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