Nearly One-Third of Hedge Fund Managers Plan to Invest in Crypto: Ernst & Young

Pardon the oxymoron, but traditional alternative investors are slowly warming to cryptocurrencies, according to a new study out today from big four accounting firm Ernst & Young.

Thirty-one percent of hedge fund managers, 24% of alternative investors, and 13% of private equity managers said they planned to add crypto to their portfolios in the next one to two years. Managers of the largest firms–hedge funds overseeing more than $10 billion or investors with $2 billion to $10 billion–were most likely to be planning to get into crypto, according to the study.

“Alternative investment” has been an umbrella term for anything that’s not a stock, bond, or cash. That could include precious metals, art, and real estate. It could even be a binder of rare, holographic Pokemon cards or a wine collection.

It may seem like cryptocurrencies would be a perfect fit among the alternative crowd, but that hasn’t been the case. 

Only 7% of alternative fund managers and investors interviewed for the EY study said they or their firms already have “crypto-related assets” in their portfolio. Of those holding cryptocurrencies directly, derivatives (futures or options) and providing funding to private blockchain companies were the most popular forms of participation.

Joe McCarney, the global blockchain assurance leader at EY, told Decrypt an even smaller number of firms were invested in crypto in 2020. That was before a question specifically asking about them had even been added to the poll. 

Seventy-eight percent of holdout firms cited the fact that crypto doesn’t fit into their fund’s strategy as the top or one of the top reasons they hadn’t yet invested. The other top reasons included volatility, regulatory uncertainty, and a lack of understanding of the asset class.

The 2021 Global Alternative Fund Survey, conducted by Greenwich Associates from July to September, polled 264 alternative institutional investors. It’s a small pool of respondents, but they represent funds that total nearly $5 trillion.

The response window missed the SEC’s approval of the first Bitcoin futures ETF—an investment vehicle that allows purchasers to gain exposure to Bitcoin without actually buying and holding the asset—by a few weeks, but McCarney said he doubts it would have had a big impact on sentiment among alternative fund managers.

From what he’s seen, alternative fund managers care more about cybersecurity and the availability of institutional-grade custody solutions.

“I believe that a larger catalyst for this movement into digital assets has been the continued enhancements to the institutional level controls being put in place at custodians and exchanges,” McCarney said. “These enhancements have helped to overcome some of the earlier concerns about security of digital assets.”

Those enhancements and controls have included multi-signature transaction approvals, as opposed to figuring out who to trust with a private key, and the ability to generate detailed audits that will pass muster with regulators.