Right now is an optimal moment to invest in cryptocurrency hedge funds.
This sentiment is echoed by Chris Solarz, who serves as the chief investment officer for digital assets at Amitis Capital, an organization managing a fund of funds focused on cryptocurrencies — essentially, a fund that channels capital towards different asset managers.
“We’re entering a golden era for crypto hedge fund investments,” Solarz commented during a conversation, noting his previous role where he oversaw nearly $8 billion in allocations at a hedge fund advisory company. “The stars are aligning. This favorable market environment, combined with the vast potential of blockchain technology, is significant. Simultaneously, the pool of effective money managers is quite limited, making it easier for me to identify top talent.”
Solarz pointed out that because the crypto markets are in their infancy, managers can apply similar trading strategies that were utilized in traditional finance 35 years ago, during the early days of hedge funds.
Back in 1990, only 127 hedge funds existed, managing around $39 billion in assets. Fast forward to 2024, and there are over 10,000 funds managing roughly $5 trillion. This surge in competition has made surpassing market performance decidedly more challenging.
According to Solarz, the crypto sector, which currently comprises about 1,650 hedge funds managing $88 billion, is roughly ten times less competitive than traditional finance. This allows money managers to resurrect and adapt strategies that lost effectiveness over a decade ago due to market saturation.
“When I meet with 20 crypto managers, I often find that 19 do not warrant managing funds,” Solarz stated. “Many are inexperienced, having never handled money. They claim to invest in bitcoin, ether, and solana, and I question, ‘Why should I pay you 20% for that?’ … If I’m giving 20% to a manager, I expect more than what’s easily accessible to me or purchasable through an ETF.”
According to Solarz, the crypto landscape is anticipated to continue offering distinct advantages to investors until the technology is fully assimilated into the broader financial ecosystem. Just as you no longer hear of companies identifying themselves as dot-coms, there will come a time when crypto won’t be considered a separate entity from traditional finance — perhaps when bitcoin reaches a market capitalization comparable to gold, which he believes could be in the next decade.
No altcoin season
Solarz reviews three main categories of funds for investment opportunities: venture funds (which invest in startups), liquid directional funds (which speculate on market movements), and liquid market neutral funds (which seek profit regardless of market fluctuations).
When assessing liquid directional funds, Solarz prioritizes the manager’s approach and risk management over their specific investment thesis. What is their investment methodology? Is it sustainable? How do they consider macroeconomic factors? He then incorporates performance metrics into models to evaluate the value added by the manager.
“It’s relatively easy to dodge major losers, but identifying consistent winners is always a challenge,” Solarz noted. “When something feels off or lacks a solid investment strategy, it’s straightforward to say no, but luck plays a role in consistently outperforming the market.”
This analytical process must be rigorous, as the era of all cryptocurrencies rising together — known as altcoin seasons — is now behind us, according to Solarz. He estimates that the crypto ecosystem contains around 40 million tokens and expects nearly all to ultimately lose value. “There are only about 100 tokens truly worth discussing,” he asserted.
To maintain current price levels over the next three years, Solarz suggests that the crypto market will need at least $300 billion in fresh capital, due to significant token unlocks anticipated to burden the leading 100 tokens. He indicated that the liquid token market for hedge funds is roughly $30 billion, while retail traders have shifted focus to memecoins. In essence, there is a lack of buyers for this surplus supply.
“This represents a major challenge. It’s why a broader altcoin bull market isn’t likely to materialize for some time,” he stated.
Market neutral strategies
Historically, crypto venture capital funds have attracted five times more investment than all liquid crypto funds combined, as venture capital allows for concealing mark-to-market losses from scrutiny by investment committees. This trend is one reason Amitis identifies more potential in liquid assets. Solarz has so far allocated capital to 14 funds, comprising three venture capital funds, four liquid directional funds, and seven liquid market neutral funds.
“It might be a bit simplistic, but at the institutional level, the focus is on not losing money, whereas at family offices, we aim to grow returns,” Solarz explained. “If there’s an extraordinary venture capital opportunity, I might consider it, but the return expectations are considerably higher when committing for a decade.”
Solarz affirmed that market neutral strategies remain quite lucrative. For example, during a regional crisis last December when South Korea was under martial law, traders were able to arbitrage cryptocurrency prices on local exchanges. South Korean investors, in a state of panic, sold, while global prices remained stable, creating a window for profit.
Another favored strategy involves capitalizing on the funding rates tied to perpetual contracts. Institutional investors often short a cryptocurrency while simultaneously gaining spot exposure, allowing them to remain entirely market neutral while reaping interest from these contracts, which can sometimes yield annual returns of up to 30%. This same approach is used with spot bitcoin ETFs and bitcoin futures offered by CME Group.
“This is the method applied in this area, and it continues to yield profitable, consistent double-digit returns,” Solarz remarked.