(Bloomberg) — New funds focused on cryptocurrency strategies are opening shop at a much faster pace as hype returns to the market on the back of new ETFs dedicated to the asset class.
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The first three months of the year saw 25 new venture-capital and hedge funds launched, the most since the second quarter of 2021, according to Crypto Fund Research. That’s double the number that closed during the same period and almost triple the nine funds that emerged in the first quarter of 2023. Last year, the number of new crypto funds barely exceeded the number of closures after the asset class was left in tatters by a bear market.
The bankruptcies of hedge funds Three Arrows and Alameda Research opened opportunities for new players to come in as the market rebounds, said Joshua de Vos, research lead at data provider CCData. And among funds that did survive, many have lodged double- and triple-digit percentage returns in recent months.
“Given the cyclical nature of cryptocurrency, it is highly likely that new crypto-native funds will emerge to help fill the void left by these entities and take advantage of the new opportunities that arise during this cycle,” de Vos said.
Among new funds that have launched, Xavier Meegan started Frachtis — which means “hedge” in Greek — in February of this year. Casey Caruso, who used to be a partner at crypto investment firm Paradigm, started Topology to invest in crypto and artificial intelligence. In May, Steven Waterhouse, co-founder of crypto startup Orchid Labs, launched Nazare Ventures, which is investing in the intersection of crypto and AI as well. Existing firms like Pantera Capital are also raising new rounds of capital en masse following several dry years.
The total crypto-dedicated hedge-fund market has grown from $16.3 billion in December to reach $21 billion for the first time since October 2022, according to tracker Galaxy VisionTrack.
‘Really good time’
“It’s been a really good time for a lot of actively managed strategies to raise new funds,” Bailey York, data lead for VisionTrack, said in an interview.
Still, the rate of new fund launches is well below the heydays of 2017, when about 73 new funds launched per quarter, more than doubling the number of total crypto funds that year, per Crypto Fund Research.
What’s more, fundraising for the new vehicles still isn’t as easy as it once was. On the venture-capital side, new fund raises tend to be smaller than in 2021 and 2022, for example, because there are fewer investors new to the space. In the first quarter, only $2.62 billion was invested across 631 VC deals, according to VisionTrack. That’s less than the $2.9 billion invested across 781 deals in the same year-ago period, and a fraction of the $7.2 billion that was invested across 817 deals in the first quarter of 2021, per VisionTrack.
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Much of the revival in crypto markets this year can be attributed to the January launch of exchange-traded funds that invest directly in Bitcoin, as well as progress toward regulatory approval for ETFs based on Ether, the second largest cryptocurrency.
While the ETFs have helped bring the market back to life, they also present hedge funds with stiff competition by offering cheap, simple and safe opportunities for investors looking for passive exposure to the asset class.
ETF Cannibalization
“Crypto hedge fund launches are likely to be somewhat smaller than they were a couple of years ago, in part because crypto ETFs have cannibalized a portion of the crypto hedge fund market,” said Josh Gnaizda, CEO of Crypto Fund Research.
Meegan, who is trying to raise $20 million, has been fundraising hard for about five months.
“It’s still quite hard to raise money,” Meegan said. “There aren’t a lot of new LPs in this space. And you have to be very differentiated. It’s almost tougher than ever to raise a first-time fund.”
Steven “Seven” Waterhouse disagrees. He used to be a partner at crypto investment firm Pantera Capital and is now raising $50 million.
“I’d say it was harder in 2014 to 2016, when I was with Pantera, to raise money,” Waterhouse said. “The question I got was, ‘does this thing even make sense?’ Now the question is quite different: ‘What’s really going to happen next and what’s the big deal?’”
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