Crypto hedge funds are among the main victims of the FTX debacle. Some are likely to have to shut down altogether after optimism reigned at the start of the year.
Travis Kling was brimming with confidence three years ago when he talked about the prospects for the crypto market in an interview with the American television station CNN. Bitcoin is “the hardest currency in human history” and an insurance against “monetary and fiscal irresponsibility of central banks and governments,” he said, quoting from the Old Testament during the interview. Kling founded the crypto hedge fund Ikigai Asset Management a year earlier, at a time when countless such funds were being created.
On Monday a week ago, nothing was left of Kling’s confidence and his customers’ money. “Unfortunately, I have some pretty bad news to share,” the Ikigai founder wrote on his Twitter account.
Unfortunately, I have some pretty bad news to share. Last week, Ikigai caught the collapse of FTX. We had the vast majority of the hedge fund’s total assets in FTX. When we went to download mrng on monday we got very little. Now we are stuck next to everyone else.
— Travis Kling (@Travis_Kling) November 14, 2022
Crypto hedge fund Kling has lost access to most of its investor funds following the bankruptcy of FTX, one of the world’s largest cryptocurrency exchanges. After panic broke out in the market, an attempt was made to withdraw funds from FTX, but “very little” came of it. “Now we’re stuck with everyone else,” he tweeted.
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Ikigai is one of the many crypto hedge funds that saw huge losses in the wake of the FTX collapse. Experts predict a total of billions.
There are several hundred such investment vehicles around the world. Their goal is to get the maximum return from the already risky crypto market with complex and at the same time high risk trades. Strategies range from investing in newly created cryptocurrencies, exploiting price volatility to arbitrage transactions. The risks of such transactions are considered high, even compared to traditional hedge funds.
Crypto hedge funds are accessible to investors who are willing to invest hundreds of thousands, if not millions, of dollars. According to a spring 2022 survey by consulting firm PwC, highly mobile private individuals (“high net equity individuals”) and so-called family offices are among the most important customers of crypto funds. Operators are paid a management fee averaging 2 percent and, if successful, a performance fee averaging 20 percent; This represents an incentive for the fund operator to achieve the highest possible return.
As long as key interest rates were low and the prices of Bitcoin and other cryptocurrencies were rising, this strategy worked well. With the onset of crypto winter since the beginning of the year, i.e. the price collapse of many cryptocurrencies and the bankruptcy of FTX, many crypto hedge funds are facing hard times.
Industry service Crypto Fund Research estimates that 25 to 40 percent of crypto hedge funds and crypto venture capital funds are directly affected by the demise of FTX. “Some funds had only very modest exposure, while others held a large portion of assets in the stock market.” On average, this is about 7 to 12 percent of assets under management.
A case with high losses is Galois Capital: As the “Financial Times” recently reported, about half of all assets under management of the crypto-hedge fund, estimated at $ 100 million, are blocked on FTX. Galois co-founder Kevin Zhou wrote in a letter to investors that it would take years to recover a percentage of the assets.
But fund operators who did not do business through FTX are also likely to be drawn into the debacle: the defunct exchange was linked to companies around the world that are now themselves facing bankruptcy in the wake of the collapse. This was compounded by increased losses in the value of Bitcoin and other cryptocurrencies due to the FTX debacle.
Optimism still prevailed at the beginning of the year
Hedge fund operators interviewed by PwC only expressed optimism at the beginning of the year that the crypto boom will continue even after the reversal of interest rates. All respondents said that the price of Bitcoin will be higher by the end of the year than at the time of the survey ($40,000). Fund managers expected a median bitcoin price of $75,000. In fact, it is currently $16,000.
Crypto hedge fund investors seem to have had enough for now: Crypto Fund Research expects to withdraw a record $2 billion from the funds over the next few months.
Ikigai founder Kling wrote in his Twitter thread that he still doesn’t know how his company will continue. He was at a loss for the “manure pile” permeating the crypto-economy. “So many bloody sociopaths were given the opportunity to do so much evil. It’s hard for me to imagine the industry recovering from this quickly. Too much has burned too much.”