are specific to the crypto realm, though similar to buying shares in a regular fund except that quotas are bought in the form of crypto coins or tokens. A fund of funds (6% of our sample) takes a multi-manager approach and invests in a set of funds in the same way as in standard markets. We can classify fund managers’ strategies in similar ways to traditional equity funds: long-short, long-term, market neutral, multi-strategy, and opportunistic. Long-short funds primarily employ a short- or medium-term investment process seeking to capitalise on the volatility of the market. Long-term funds tend to invest in early-stage projects as well as implementing long-only strategies in the largest and more liquid cryptocurrencies. These tend to have the longest lock-up for investors. Market neutral funds seek to have neutral exposure to the market trend by over- or underweighting certain assets. These strategies focus on making concentrated bets based on pricing discrepancies across cryptocurrencies. Opportunistic funds target underpriced digital assets to exploit special situations, such as the announcement of joint ventures, bugs in the protocols, or other events that might affect an asset’s short-term prospect. Multi-strategy funds combine all of the above. POSITIVE RETURNS Our evidence shows that managers of crypto funds are able to generate large and economically significant returns, which may be explained by the low levels of competition on the market. During the time period we studied, the average crypto fund significantly outperformed both the average hedge fund and the aggregate equity market, with an astonishing 600% cumulative return, compared to between 40% and 60% for equity funds. There is no dominant strategy. Some managers outperform others irrespective of their approach, though three strategies reap the biggest rewards: Long-term, long-short, and multi-strategy. Monthly adjusted returns on all funds average 3.71%, with TF generating 8.15% at the top end, more than twice that of other funds: FoF (3.08%); HF (2.7%) and others (3.99%). Overall, the results show that, at the aggregate level, cryptocurrency funds provide positive value for investors above and beyond the standard trajectory of the overall markets, and allowing for a substantial variance in the levels of performance. MORE THAN LUCK These markets are characterised by an incredibly high volatility in returns, making disentangling luck and skill on the part of fund managers more difficult, but the extreme outperformance of managed funds compared to passive investment benchmarks is unlikely to be explained by good luck on the part of fund managers. We found that while the majority of funds produce profits within the 0% to 5% range, with a sizeable number above 10%, the best and worst managers can reach -17% and +38% respectively on a monthly basis. The performance of a handful of the best funds is stronger than anything that could be explained by fortune. So, the evidence is there that managed funds in cryptocurrency markets do pay off – if you can afford them and are willing to take the risk. Although there is evidence of strong economic performance, this is still a highly volatile and risky market, and performances of fund managers are correlated accordingly. FIFTY FOUR DEGREES | 11 Dr Mykola Babiak is a Lecturer in Finance in the Department of Accounting and Finance. His research centres around asset pricing, macro-finance, financial derivatives, and digital currencies. He is particularly interested in understanding how investor expectations and uncertainty affect asset prices. Recently, his work is focused on unravelling the drivers of asset returns and premiums in the foreign exchange and cryptocurrency markets. The paper On the performance of cryptocurrency funds, by Dr Daniele Bianchi, of Queen Mary University of London, and Dr Mykola Babiak, is published in the Journal of Banking and Finance. m.babiak@lancaster.ac.uk
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