Exploring the Landscape of Crypto Funds
Professor Andrew Urquhart, an authority in Finance and Financial Technology and the Head of the Department of Finance at Birmingham Business School, presents the fourth edition of the Professor Coin column. This series aims to deliver significant insights derived from scholarly research on cryptocurrencies to the Decrypt audience. In this installment, we will delve into the realm of crypto funds.
Evolution of Cryptocurrency Investment
In recent years, cryptocurrencies have experienced a shift towards financialization. Initially, investors seeking to engage with cryptocurrencies had to directly purchase coins from exchanges, familiarize themselves with blockchain technology, and manage their own private keys, which involved self-custody of their digital assets. Historically, investors could only adopt a long position in cryptocurrencies, with Nobel laureate Robert Shiller attributing the 2017 price bubble to the limited options available, primarily focusing on Bitcoin.
Introduction of Cryptocurrency Products
Since 2017, a variety of cryptocurrency-related products have emerged, broadening access for investors within the mainstream financial sector. The launch of Bitcoin futures contracts on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) in December 2017 marked a pivotal moment. This was followed by the introduction of a futures exchange-traded fund (ETF) in October 2021 and the anticipated listing of a spot ETF in January 2024, making it easier than ever for investors to gain exposure to the cryptocurrency market.
Accessing the Market through Crypto Funds
Today, investors can participate in the cryptocurrency market by investing in crypto funds. These funds manage portfolios composed of liquid digital tokens, overseen by professional investment teams that typically combine expertise in finance and technology. Recent data from Crypto Fund Research indicates that the average assets under management (AUM) for these funds exceed $150 million, with fee structures comparable to those of hedge funds, including management fees around 2% and performance fees exceeding 22%.
Performance of Crypto Funds
Crypto funds exclusively invest in cryptocurrencies and strive to time the market effectively to deliver superior performance for their clients. However, the question arises: how successful are these funds in achieving their objectives? The initial research examining crypto fund performance was conducted by Bianchi and Babiak (2022), revealing that these funds tend to generate significantly higher returns and alphas—representing excess returns beyond a benchmark—compared to passive investment strategies and traditional risk factors. Their findings suggest that the success of these funds cannot simply be attributed to chance, implying that they are genuinely outperforming the broader cryptocurrency market.
Mixed Insights on Fund Performance
Contrastingly, a subsequent study by Dombrowski et al. (2023) indicates that only a limited number of crypto funds possess exceptional managerial skills. Given the skewed nature of fund returns, the selection of performance metrics can significantly influence the ranking of these funds, necessitating caution in evaluating their performance.
Future Outlook for High-Performing Funds
A recent analysis by Conlon et al. (2025) highlights that crypto funds can yield impressive excess returns, with top-performing funds maintaining their success over time. This outperformance is attributed to the market timing acumen of their managers.
Managerial Experience and Fund Performance
Are there specific traits that enhance the likelihood of a crypto fund outperforming the market? Research by Urquhart and Wang (2023) reveals that crypto funds led by managers with prior hedge fund experience tend to achieve notable returns, while those managed by individuals with backgrounds solely in cryptocurrency or blockchain do not necessarily outperform. This suggests that the experience in fund management, irrespective of the sector, plays a critical role in determining the success of crypto funds.
Conclusion: The Future of Crypto Fund Investment
The academic studies indicate that investing in crypto funds can be a beneficial strategy, as these funds have the potential to surpass market performance, particularly when managed by individuals with specific qualifications. However, with the launch of Bitcoin and Ethereum spot ETFs anticipated in 2024 and additional approvals possibly on the horizon, along with changes in the political landscape, it remains uncertain whether these managed funds will continue to enjoy a performance edge in the market.
