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How Hedge Funds are Gaining Sustained Alpha from Crypto Volatility

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When cryptocurrencies first appeared on the financial landscape over a decade ago, they were the sole domain of techies—as distant from the investment establishment as conceivably possible. But many things that start with techies end up going mainstream over time—just think about the early days of online shopping. Today, not only are cryptocurrencies accessible to investors of all types, they are rapidly becoming a critical element of any sound investment profile.

The Crypto Market is Growing Despite Volatility

The problem is that cryptocurrencies are famously volatile. Unlike stocks for well-established companies that tend to show a small but steady average annual return, a tweet or a change in regulation can lead to enormous fluctuations in cryptocurrency values. 

In 2021, for example, the world watched in awe as Bitcoin values soared to unprecedented levels of over $65,000 at several points in February, April, and November. Yet it is important to note that, although they stabilized within a short time, values remain high, and overall, cryptocurrencies offer far better returns than stock market averages. 

The trend towards the institutionalization of crypto creates a significant alpha opportunity that asset managers can no longer afford to ignore. As the total cryptocurrency market capitalization exceeds $2TN—40 times what it was four years ago, it is no longer the anti-currency. The opposite is true—investors are beginning to perceive crypto as a potential gold mine. However, the concern that crypto may be a fad, paired with regulatory uncertainty and ongoing volatility continues to be barriers to investment.  

Hedge Funds are Showing Interest

Hedge funds have started dipping their toes into the field, but there is still deep hesitancy as can be seen by the fact that, on average, hedge funds invested only 3% of their total assets under management in digital assets in 2020. But those investments gave remarkable returns—the median crypto hedge fund return was +128% in 2020 (vs +30% in 2019). 

The impressive performance and low correlations of this new asset class are leaving investors thirsty for the returns that it can offer. In fact, in a PWC survey, over 85% of the hedge funds surveyed said they plan to increase their investment in the digital asset class in the coming year. Experts estimate that 7% of crypto assets will be held by hedge funds by 2026. 

Technology Opens Up New Opportunities for Smarter Investments

No longer fueled by hype, the cryptocurrency market is now transitioning from a trading environment to an investing environment. Instead of grab trades, investors are building long-term investment strategies and looking for smarter ways to access this promising market. 

In the past, institutions had the investment edge because they used big data and advanced analytics to mitigate risk. However, institutional-grade custody, trading, and product solutions are now entering the wider crypto market, attracting significant attention from investors. Data and technology are now available to everyone, and investors of all sizes and types can leverage best-in-class tools to manage the volatility of crypto investing. 

Algorithmic investing shows particularly high potential. Whether it’s through advanced opportunity identification or automated trade execution, AI tools let investors approach the crypto market in a smarter way. For investors looking to gain sustainable alpha from crypto who are concerned about the volatility and risk, algorithmic investing is often the way to go.

Advantages of Algorithmic Investing

There are many advantages to algorithmic investing. Some of the key benefits include: 


Investors have different risk tolerance and there is no one-size-fits all.  Algorithmic investing is adaptable and pliant, so investors can set custom core parameters, like when to make a trade, when to get out, how to manage risk and more that can be applied across a variety of asset classes to match investor risk appetite levels. 

Full Custody

With algorithmic investing, clients maintain full control and custody of all funds through the use of separately managed account solutions. That means software on the account is used to manage funds rather than moving money around. This gives investors more protection, and can allay some of the concerns about the risks associated with crypto assets.

Automatic Trade Execution

Algorithmic investing also enables investors to respond to opportunities in real-time with automatic trade execution based on the power of AI.  Automatic trade execution eliminates the slippage that can occur when waiting for a human being to make a trade. The unmatched speed of execution creates ultra-accurate trading, maximizing potential returns while minimizing risk. 

Technical Due Diligence for Hedge Fund Managers

Hedge fund managers are often aware that there is significant alpha in the crypto world, but there is a reputational risk. They need to be able to show their clients that they are managing risk and asset classes responsibly. They need a strong investment thesis to build client confidence, which means either building their own rules of when to buy and sell and hiring a team to implement their investment strategy, or using an AI tool that has a good track record. Although there are never any guarantees, smart market-proven, institutional-grade tech offers a data-based, definitive, and authoritative approach to investing—a type of technical due diligence.

Tech Gives You the Tools to Capture the Alpha, Despite Volatility

The sharp price swings we saw in 2021 are unlikely to disappear anytime soon, but the crypto market has proven remarkably resilient through periods of technological, economic, and regulatory upheaval. And with best-in-class technology, investors can now navigate the volatility and gain from the crypto market alpha. 

The proof is in the pudding. Here at Endo, with a monthly crypto algo volume of $2,412B and 162,548 total connected client accounts, our algorithmic investment performance is consistently far above market averages. Check out the performance of each of our strategies with trade-by-trade transparency and learn more about how you can invest smarter with institutional-grade tools. 

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