Three Big Takeaways From The Coinbase Crypto Hedge Fund Report

Crypto hedge funds have done rather well these past few years, with many clocking exceptional results. And with better regulation and security, these funds are becoming more popular with big-money investors. Coinbase’s 2024 Allocator’s Guide To Digital Asset Hedge Funds explains the ins and outs of crypto investing and the benefits it may bring. Here are three important takeaways from the report and the potential opportunity in each.

1. Active management is king in crypto.

Most stock investors have a hard time consistently beating the market – that’s why many opt for “passive” ETFs that simply track an index like the S&P 500. But “active” hedge fund strategies seem to have a better hit rate in crypto. Digital asset hedge funds performed better than bitcoin (the de-facto crypto index) from 2017 to 2023, according to the report. The Preqin Cryptocurrency Hedge Funds Index (blue, in the chart) puts the yearly returns of your average crypto hedge fund at around 80% over that time – about 8% higher than bitcoin’s (yellow). And the index did that with less volatility, too.

The Preqin Cryptocurrency Hedge Funds Index tracks the performance of over 1,000 crypto hedge funds. It has achieved higher yearly returns on average than bitcoin, with less volatility. Sources: Preqin Pro, Factset.

These results ring true to me. After all, crypto is still a new asset class with a less efficient market – meaning it’s full of opportunities for pros to find hidden gems and profit from major price swings. Unlike the stock market, where passive investing often works best, crypto’s wild nature means active strategies can really shine. In fact, here are a few strategies that crypto hedge funds already use: