Why This Giant Hedge Fund’s Planting Seeds In The Deserted Crypto Scene

Why This Giant Hedge Fund’s Planting Seeds In The Deserted Crypto Scene
Jonathan Hobbs

over 1 year ago5 mins

  • Man Group – the world’s biggest publicly-traded hedge fund company – is launching a crypto fund, despite the recent market turmoil.

  • The firm believes that crypto has enough liquidity and volatility to make it attractive for certain trading strategies.

  • And while Man Group’s kept its crypto strategy close to its chest, the firm’s own research shows that trend-following strategies tend to do well with bitcoin and ethereum.

Man Group – the world’s biggest publicly-traded hedge fund company – is launching a crypto fund, despite the recent market turmoil.

The firm believes that crypto has enough liquidity and volatility to make it attractive for certain trading strategies.

And while Man Group’s kept its crypto strategy close to its chest, the firm’s own research shows that trend-following strategies tend to do well with bitcoin and ethereum.

Mentioned in story

Investors might be fleeing the disaster-struck crypto world as fast as they can, but one calculating hedge fund is wading straight in. London-based Man Group (ticker: EMG) – the world’s biggest publicly-traded hedge fund firm with $140 billion of assets under management – is about to launch a new fund entirely dedicated to crypto. And since Man Group’s keeping its cards close to its chest, I’ve taken a closer look at the “investors’ guide to crypto” report it published in November. Here’s how – and why – the hedge fund giant might be trading crypto after the crisis, and how you could use the information to give your own strategy an edge.

Why is Man Group getting into crypto?

1. Institutions are interested.

Big money’s tossed crypto to the side for years, but mainstream institutions are starting to pay attention now that the no-longer-niche digital asset sector has branched out into a diverse set of assets. Man Group believes we’re witnessing the institutionalization of the crypto market, and while regulation would bring some unknown risks along, the firm thinks that’s unlikely to squash the sector altogether.

2. Crypto’s volatility is a good thing for hedge fund strategies.

Crypto is volatile, that’s for sure: in fact, Man Group studied bitcoin’s daily price moves from 2017 to mid-2022, and found it’s around four times as volatile as the S&P 500. That means a portfolio with a quarter in the OG cryptocurrency and the rest in cash would see roughly the same daily swings as the SPDR S&P 500 ETF Trust (Ticker: SPY, expense ratio: 0.09%).

That’s no bad thing for big traders: crypto’s volatility and liquidity means they can make money by using different trading strategies – not just holding for longer. Thing is, Man Group thinks a heavier institutional presence could tame crypto’s volatility in the coming years, making it act more like commodities or traditional currencies. That’ll depend on the token, of course, but my interpretation is this: the good times won’t always be this good for hedge funds that like trading volatile moves, so many are looking to jump in sooner rather than later.

3. Crypto can be good for diversification – just not when you need it most.

Bitcoin tends to do its own thing in “normal” market conditions (blue bars), meaning it isn’t usually that correlated with other riskier investments like commodities and stocks. But just as we saw this year, that tends to fall out the window when stock markets start dropping (orange and gray bars). So while adding a bit of bitcoin to your portfolio might give it some extra oomph at times, don’t expect it to protect you when the sky is falling – at least, if history is anything to go by.

Bitcoin’s correlation to other asset classes, depending on stock market conditions. Source: Man Group.
Bitcoin’s correlation to other asset classes, depending on stock market conditions. Source: Man Group.

Can you copy Man Group’s crypto investment strategy?

Hedge funds seldom give away all their trade secrets, but even if they did, most of us would have a tough time trying to replicate them. Man Group’s well-paid team of number-crunching quants are one fierce force, and its automated algorithms execute trades with ruthless precision.

That said, Man Group did drop a few breadcrumbs in its report: it suggests that trend-following could beat the simple tack of buying and holding bitcoin – especially when you consider how much bang you get for your risk buck. That’s a common hedge fund strategy: the basic idea is that you hold an asset when its price is trending upward, and short it or hold cash when the asset’s price is headed downward. But because the trend-following strategies Man Group mentioned aren’t too practical for the average investor, I’ve come up with two simpler versions that might pique your interest.

1. The bear market-beating strategy.

Here’s the simplest trend-following strategy out there: only own bitcoin when it's sitting above its “10-month moving average” at the end of each month, and sit in cash when it's lying under it. I’ve written a full pack explaining moving averages here, but here’s the short version: in this case, the 10-month moving average is a constantly updating – or “moving” – average of bitcoin’s price over the past 10 months.

I used Portfolio Visualizer to backtest how $1,000 invested in this strategy (blue line) would have done over the last five years, compared to just holding bitcoin (black line) or investing in the S&P 500 (green line). As you can see, you’d have bypassed a big chunk of bitcoin’s current bear market with the moving-average strategy, and you’d still have gained a lot of the upside during the good times.

Value of $1,000 invested (Jan 2018 to present day) using 10-month moving average strategy.
Value of $1,000 invested (Jan 2018 to present day) using 10-month moving average strategy.

2. The 3 and 6-month moving average cross strategy.

If you want to get fancy, you could use a moving average cross strategy. That means you would buy bitcoin when the 3-month moving average crosses above the 6-month moving average, and retreat to the safety of cash if it dips below it at the end of the month. Here’s how that would’ve worked out for you over the last five years:

Value of $1,000 invested (Jan 2018 to present day) using 3 and 6-month moving average cross strategy.
Value of $1,000 invested (Jan 2018 to present day) using 3 and 6-month moving average cross strategy.

What’s the opportunity here?

Trend-following strategies make a lot of sense with volatile assets like bitcoin: they can keep you in the game when prices are on the up, and leave you in cash when it's time to play defense. But bear in mind, the results won’t always beat classic buying and holding, as a lot can depend on when you start – and finish – using the strategy.

As the name suggests, trend-following strategies work better with investments that have lasting up-and-down trends, rather than with ones that range sideways for years on end. You can read my Insight about the 50-day moving average bitcoin strategy if you’re interested in finding out more about that.

You do have one last option: if you want to leave risky ol’ crypto trading to the experts, Man Group’s stock is trading at a price-to-earnings ratio of around 6.4 and offers a yearly dividend yield of about 5%. So if you think the firm’s crypto bet might be a long-term winner, this could be your chance to back it.

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