Crypto is an asset that has been adopted by major financial institutions after a long time, only being popular in retail circles.
A clear example is that several institutions and large companies, such as asset management companies, have adopted crypto into their portfolios.
Not only that, some asset management companies have even dedicated their funds only to managing crypto assets.
Seeing the high risk of crypto, many asset management companies categorize themselves as hedge fund managers because they have adopted crypto. This phenomenon makes more investors interested in knowing what a hedge fund is and what a hedge fund is in the world of crypto assets.
Understanding Hedge Funds
Hedge funds are a category for asset management companies or fund managers who generally take riskier investment assets.
In contrast to mutual funds or other investment managers, hedge fund companies have a riskier mechanism to maintain the value of the client’s assets.
The purpose comes from the word hedge, which means a hedge where it is hoped that the hedge fund can maintain the value of the assets under management and even increase it.
Hedge fund companies are services where the service manages investors’ assets in a legal but risky way.
Funds managed generally come from a few specially selected investors and have a sizeable nominal value.
In the crypto world, hedge funds generally manage these funds in several crypto assets and their derivative assets, such as crypto futures and options. Diversification is carried out to ensure the value of the protected assets increases significantly.
Characteristics of Hedge Funds
Generally, hedge funds have unique characteristics that differentiate them from other asset management or investment management companies.
First, hedge funds can spread or diversify their managed funds into assets according to their license.
This characteristic differs from other managed funds types, such as mutual funds, where investment products are generally limited to stocks, bonds, currencies, and a mixture of the three.
Hedge fund managed funds can be allocated to several other assets, such as derivatives, thus making the risk higher even though it is still legal.
Second, hedge funds often use leverage or debt to enlarge their investment positions.
This leverage or debt fund can be used to increase the profit potential of a hedge fund.
But remember that this leverage also raises the hedge fund risk because a bigger one equals a more significant loss.
Third, hedge funds do not accept investors with small funds.
The hedge fund will also examine the daily income of investors to see their eligibility to receive services from the hedge fund.
This check is carried out to ensure that investors can accept the risks provided by hedge fund services.
Fourth, hedge funds have different fee structures.
Since a hedge fund is a service company, there are costs involved in managing the funds.
Unlike other investment managers or asset management companies, hedge funds apply the 2% and 20% fee principles.
A 2% fee will be taken from the managed fund plus a 20% fee from the profits earned. This figure differs much from mutual fund companies or other investment managers who generally take management fees or management fees from transactions alone.
Objectives of Hedge Funds
The overall purpose of hedge funds is to manage investors’ funds to maintain the value of their assets and even increase them.
The trick is to allocate most of the assets under management to risky investments.
By using risky assets, hedge fund managers will get high-profit potential and stay awake because they are still allocating some funds to safe assets.
This plan is an investment strategy used where there is an allocation to risky assets and safe assets so that if there is a loss from risky assets, safe assets can cover it.
The difference between the two types of assets will be seen from the movement so that when risky investments fall by 5%, safe assets may only decrease by 0.5% or increase by 2% to cover some of the losses.
To measure the difference in these types of assets, hedge fund managers go through the stages of mathematical and statistical calculations and need high knowledge of finance.
Examples of Hedge Funds in Crypto
The popularity of crypto around the world today has paved the way for a new category of hedge funds that are genuinely dedicated to crypto.
Many hedge funds focus on crypto to benefit from investment products in the crypto world.
Several hedge funds allocate their funds to crypto in large and small amounts.
The two most significant hedge funds in the crypto world today are Pantera Capital and Polychain Capital.
The world’s largest hedge fund, BlackRock also seen slowly starting to enter the crypto world.
Seeing the funds under management that reach $10 trillion, the crypto hedge fund world will continue to grow for the next few years.
Benefits of Hedge Funds in Crypto
Investors generally look for hedge funds when they have relatively large funds and require the expertise of others to increase the value of their funds.
Another reason investors seek hedge funds, huge investors, is the unwillingness to manage their funds.
Many turn to crypto to find hedge funds because the crypto world provides several benefits.
One of the most significant benefits of hedge funds in the crypto world is the abundance of crypto-related investment products.
Most investment assets in the crypto world are no longer based on fiat money, so fiat money can be used as an alternative only to attract profits.
Currently, many derivative assets or derivatives of crypto, such as futures and options, have many types.
Examples are perpetual and traditional futures or contract types beyond vanilla or standard crypto-bound options.
In addition, there are also many new investment products in the crypto world, such as mutual funds based on several cryptos based on their sector or crypto units.
One example is GameFi or Defi-based crypto mutual funds, which contain a collection of crypto that belongs to that sector category.
With so many choices, hedge funds can generate relatively large returns. Mainly due to the presence of derivative assets that allow hedge funds to open short positions with leverage.
The choice of crypto-based investment instruments also gives hedge funds the convenience of determining the allocation of funds based on timeframes. Sometimes hedge funds will allocate assets for both long-term and short-term profits. So the allocation of investment funds based on the period is very suitable.
Advantages and Disadvantages of Hedge Funds Crypto
hedge funds are an attractive alternative for investors who don’t mind spending money on investment management services.
For investors with high-value assets interested in investing in digital assets, hedge funds in the crypto world are the best alternative.
The advantage of prominent hedge funds is their flexibility in choosing the type of asset because they are not stuck in one or two investments.
This convenience provides higher profit potential and is more diverse with many alternatives.
Hedge funds also provide options for investments of various durations, ranging from long-term to short-term.
The advantage that stands out is that hedge funds are suitable for aggressive investors where significant risks are of interest, not a concern.
Unfortunately, hedge funds are not the right choice for investors who do not like high risk.
Hedge funds are one of the categories of fund management companies with a very high risk of failure.
As can be seen from the 2008 crisis in America, hedge funds were the fastest companies to go bankrupt.
Beyond that, hedge funds also have extensive service fees, unlike other investment managers such as mutual funds.
The most crucial drawback that must be known is that hedge funds are limited to only a few investors whose funds are significant and fit the qualifications. These advantages and disadvantages can provide insight into hedge funds so that investors have a good foundation if they want to use or build them.
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