5 Key Takeaways from PWC’s Global Crypto Hedge Fund Report

Last week, PWC released its 5th Annual Global Crypto Hedge Fund Report, a comprehensive analysis derived from two separate surveys – a survey of 131 liquid crypto fund managers conducted by Coinshares, and another involving 59 traditional hedge funds conducted by AIMA.

The report confirms the obvious: the turmoil of 2022 continues to have lasting effects on the way that the digital assets industry is perceived.

As always, it’s a fantastic report that offers a peak into how crypto natives and traditional finance are approaching digital assets at the moment. We detail five key takeaways below:

1) Counterparty risk is at the forefront of investors’ and managers’ minds:

• In 2022, liquidity was the primary determinant for crypto funds in choosing trading venues. However, in 2023, funds now place equal emphasis on both liquidity and platform security.

• Crypto funds are open to regulation, particularly when it leads to greater transparency and trust with counterparties. The wishlist below can certainly be achieved through industry-led initiatives. Already, we observe the adoption of tri-party arrangements, such as Copper’s Clearloop, enabling assets to remain with a custodian while facilitating net settlement trading.  Industry-wide participation in a tradfi-like custodial ecosystem is inevitable and necessary.  Further, the industry could greatly benefit from adopting mandatory audits, along with other transparent and disclosure requirements, as standard practices.  Managers should be able to demonstrate to investors the methodology behind counterparty selections (particularly relating to audit, fund adiministration, custody, prime brokerage, and trade venue(s)).

2) A larger proportion of crypto managers now include DEXes (Decentralized Exchanges) as a source of liquidity.

This shift is likely driven by a greater familiarity and comfort with DEXes, the availability of newer institutional quality tooling that support them, as well as the non-custodial aspect, which allows managers to retain control of their assets.

3) The percentage of traditional hedge funds investing in digital assets decreased from 37% in 2022 to 29% in 2023.

However, among the traditional funds that remain invested, there has been a notable increase in their average allocation from 4% to 7% of AUM. It’s clear that the various collapses that occurred last year have temporarily cooled TradFi interest in this space and digital assets have taken a reputational hit among the less informed. The industry will have to work cohesively to repair its reputation and bring capital (estimated $1-2 trillion) back to the table. 

4) However, it appears that the traditional funds that are currently allocated to digital assets remain committed to the sector.

Among them, 46% plan on increasing their allocations to the asset class in 2023.  While there is reputation to repair, the early adopter segment of the investment curve remains strong.

 5) Conversely, the traditional funds that have not yet allocated to digital assets have grown in skepticism, mostly due to the events of the previous year.

The percentage of funds not currently invested in digital assets that stated that they are unlikely to invest over the next three years increased from 41% in 2022 to 54% in 2023.

Undoubtedly, the events of 2022 were a major setback for the digital assets industry. However, we remain hopeful that the industry learns from its mistakes as it works to mend the self-inflicted wounds. While regulation can and will help, the industry itself can spearhead much of the necessary reform. The increased focus on counterparty risk, security, and transparency is a vital first step, and it is encouraging to see that the crypto fund industry is taking these aspects seriously. We continue to believe that there is a unique opportunity for good actors to lead the industry forward, by example and with integrity.