Even though Galaxy Digital CEO Mike Novogratz recently said he thinks two-thirds of crypto hedge funds will go out of business, PwC paints a more optimistic picture.
In its 2022 global crypto hedge fund report, PwC found that TerraUSD (UST), the failed algorithmic stablecoin, was the third most preferred stablecoin for crypto hedge funds. While this could have translated to major losses (or gains) for such funds, the consulting firm predicts that crypto-focused hedge funds will still grow.
“The recent collapse of Terra vividly demonstrated the potential risks in digital assets,” said John Garvey, global financial services leader at PwC U.S., in the firm’s press release for the report. “There will continue to be volatility, but the market is maturing, and with that is coming not only many more crypto-focused hedge funds and higher assets under management, but also more traditional funds entering the crypto space.”
PwC surveyed funds in April 2022, just a month before the Terra ecosystem unraveled. At the time, the report said 27% of funds used UST and 49% had traded its sister cryptocurrency Luna (now called LUNC by its community).
Among the many heavily invested in the original Luna cryptocurrency was Novogratz’s Galaxy. Galaxy’s investment in Luna greatly contributed to its 2021 earnings, with the firm disclosing that the cryptocurrency was one of three that drove “$1 billion in realized gains.” In the first quarter of 2022, Galaxy said its sales of Luna were “the biggest contributor” to $355 million of realized gains.
Prior to the crash, Novogratz immortalized the investment with a tattoo honoring Luna on his arm, accompanied with him declaring himself a “Lunatic.” In a letter he wrote after UST and old Luna lost all value, Novogratz noted that “my tattoo will be a constant reminder that venture investing requires humility.”
It’s not clear how “the events with Terra and the wider market disruptions in May 2022” will have impacted crypto hedge funds and their holdings of UST, Luna and other stablecoins, the PwC report reads.
Nonetheless, “crypto hedge funds continue to achieve strong growth, despite crypto’s volatility.”
Average assets under management of crypto hedge funds surveyed more than doubled to $58.6 million in 2021 from the previous year, PwC found. Additionally, 20% of traditional hedge funds have digital assets representing between 5% and 50% of assets under management.
“Increasing appetite and demand from investors has spurred interest in crypto as an asset class, spanning retail to institutional,” said Olwyn Alexander, global asset and wealth management leader at PwC Ireland. “In addition to the numerous hedge funds investing in crypto, many larger ‘traditional’ asset managers have been exploring the crypto space, working on pilots, and are now starting to launch product.”
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