As the crypto market continues to mature, hedge funds that actively manage digital assets have shown impressive performance, outpacing bitcoin while maintaining lower volatility. This makes them an attractive option for accredited investors looking for both growth and risk management in their portfolios. The 2024 Allocator’s Guide to Digital Asset Hedge Funds by Coinbase offers valuable insights into the benefits and strategies of crypto investing. Here are three key takeaways:
Active Management Excels in Crypto
Unlike traditional stock markets, where passive investing often prevails, the crypto market is still relatively inefficient, providing fertile ground for active management strategies to thrive. According to the guide, crypto hedge funds have consistently outperformed bitcoin, the market’s benchmark, from 2017 to 2023, with the Preqin Cryptocurrency Hedge Funds Index achieving average yearly returns of around 80%—8% higher than bitcoin—with less volatility.
Several active strategies have proven successful in the crypto space:
The strong performance of these funds underscores the potential for active management in crypto, making them a compelling option for sophisticated investors.
Small Crypto Allocations Can Enhance Portfolio Performance
The guide highlights that incorporating a small percentage of crypto into a diversified portfolio can significantly enhance returns without substantially increasing risk. By adding 1% to 5% of the Coinbase Core Index to a traditional 60% stocks and 40% bonds portfolio, investors could see notable improvements in annual returns, even during periods of significant market downturns.
Regular rebalancing is the key to maintaining balanced risk. This strategy helps prevent the portfolio from becoming too heavily weighted in crypto, thus controlling volatility and potential drawdowns. The report also notes that digital asset volatility has been decreasing, further supporting the case for crypto as a viable addition to traditional portfolios.
Crypto Offers Diversification Benefits
One of the most compelling arguments for including crypto in a portfolio is its low correlation with traditional assets like stocks and bonds. While bitcoin has occasionally traded in sync with tech stocks, its long-term correlation with the S&P 500 remains relatively low, with a one-year correlation coefficient of just 0.42 as of June 2024. This suggests that crypto can act as a diversifier, reducing overall portfolio risk.
Moreover, crypto’s correlation with other asset classes, such as bonds, gold, and commodities, is even lower, making it a valuable tool for diversification. By adding crypto, investors can potentially achieve a more balanced portfolio that is less susceptible to the movements of traditional markets.
For accredited investors, actively managed crypto hedge funds offer an opportunity to capitalise on the growth of digital assets while managing risk. Meanwhile, adding a small allocation of crypto to a diversified portfolio can enhance returns and provide diversification benefits, making it a prudent consideration for long-term investors. To maximise these benefits, regular rebalancing and careful selection of crypto assets are critical.
