Bitcoin is the ideal holiday gift for an underperforming hedge fund manager. Just ask SkyBridge Capital’s Anthony Scaramucci, who is diving in after his fund of hedge funds posted its worst annual performance since 2008. That’s unlikely to be a coincidence.
Whatever one’s misgivings about the sustainability of the cryptocurrency’s price rally — it has doubled in one month to a US$35,000 ($46,168) record — it’s a happier tale to tell the market than the bad structured-credit bets that saw SkyBridge clients ask for their money back. At around US$40 million, this crypto bet looks like a fig leaf next to the firm’s overall assets of US$7 billion, but one in tune with the times.
After all, the cryptocurrency’s most vocal advocates nowadays aren’t plugged-in millennials but the hedge fund world’s baby boomers and Generation X-ers — Stanley Druckenmiller, Paul Tudor Jones — backing Bitcoin as the juice their global macro trade playbooks need. As an industry, hedge funds could use the help: While November saw them post their best collective performance for six years, according to data compiled by Bloomberg, that still wasn’t enough to match returns available from benchmark equity indexes. As a specific strategy, global macro funds lagged their peer group, the stock market and the returns from the global bond market.
What lures the “smart” money to Bitcoin as a trade is the very thing that makes it such a poor currency and an unreliable store of value in times of panic: It’s an illiquid, artificially scarce and volatile commodity whose price is driven by extreme sentiments of greed and fear. “Bitcoin is the perfect vehicle for exploiting mankind’s infinite stupidity," says Julian Rimmer, a sales trader at Investec Plc. “A small percentage of one’s portfolio must be held in this ‘asset’ because gullibility never goes out of fashion.”
It could also provide a very convenient halo effect for an industry that has been shrinking for several years. Customers withdrew US$50 billion last year, leaving the total amount managed at a bit less than US$3.3 trillion, according to eVestment. Talking about Bitcoin as a new spin on “digital gold” hides the fact these are small, speculative bets from a sub-set of Wall Street — when Tudor Jones praised the “birthing of a store of value” last year, he also revealed that only 1% of his assets was in Bitcoin.
Expectations for a tidal wave of institutional money into cryptocurrencies still look more hope than reality, therefore. Aberdeen Standard Investments’ Adam Grimsley told Financial News it was “delusional” to claim institutional investors were significantly piling into Bitcoin. As for hedge funds dedicated to trading crypto, they’re still a niche pursuit. A report by PwC found that only 35% of them manage more than US$20 million, with a median size of US$8.2 million. Even more telling, 90% of their clients are either family offices or high-net-worth individuals.
The hope from the crypto-converted is that this will be enough to outdo day traders sitting at home speculating on stocks like Tesla Inc., which has also doubled in the space of a few months. Anything’s possible with Bitcoin, but if history is any guide, there may be tears ahead. The last time hedge funds “went crypto” in 2017 after a frothy run-up in the price, the ensuing downturn led to almost 70 specialized funds closing in 2019.
Either way, Bitcoin is a Wall Streeter's toy right now. The early adopters sound distinctly unenthused by the rush to recreate the worst excesses of finance on the blockchain. For this price rally to keep going, it’s the 50-year-olds who have to keep buying.
