Based on a survey conducted by PwC, the total assets under the management of crypto hedge funds globally have increased from $2B in 2019 to $3.8B in 2020. Crypto hedge funds with assets under management over $20M have increased from 35% to 46% in 2020, with median assets under management has shown a significant increase from $3.8M to $15M.
Cryptocurrency remains a small niche in the hedge fund industry as hedge funds remain dominated primarily by bonds, commodities, and other established asset classes.
Hedge funds, an Alternative Investment Fund (AIF) with diverse and complex trading strategies, invest and trade in listed and unlisted derivative securities with diverse risks As per Securities and Exchange Board of India (SEBI) (Alternative Investment Funds) Regulations, 2012, Alternative Investment Fund (AIF) mean fund established or incorporated in India in the form of a trust or a company or a limited liability partnership (LLP) or a body corporate which,-
- Is a privately pooled investment medium collecting funds from Indian and foreign investors for investing with a defined investment policy for the benefit of its investors;
- Is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999, or any other regulations of the Board (SEBI) to regulate fund management activities.
AIFs, subject to filing of the placement memorandum with the SEBI, can launch their dedicated investment schemes AIFs cannot make invitations to the public to subscribe to its securities.
- Category I AIF, with a registration fee of INR 5,00,000, primarily invests in start-up or early-stage ventures, social ventures, small and medium-sized enterprises which includes venture capital funds, SME Funds, social venture funds, infrastructure funds.
- Category II AIF with a registration fee of INR 10,00,000 it does not take up leverage or borrowing other than to meet day-to-day operational requirements.
- Category III AIF with a registration fee of INR 15,00,000uses a variety of trading options and may use leverage, such as investing in listed or unlisted derivatives. These AIFs with short-term profits, or other open-ended funds for which no explicit incentives or concessions are provided by regulators.
Setting up an AIF requires qualifying under the Schedule II of the SEBI (Intermediaries) Regulations, 2008.
For AIFs the investment objective, the targeted investors, proposed corpus, investment strategy and proposed tenure of the fund or scheme has to be specified at the time of registration. AIFs in the crypto space have an edge with strong returns coupled with exponential growth in the digital asset class adds to diversification in the industry. Even with a cryptocurrency market crash and Bitcoin prices slashed to half in May 2021 crypto hedge funds gained nearly 7% returns.
Crypto hedge funds, remain prone to volatility and requires separate risk management policies, which are being put forth. The risk management policies include establishing counterparty due diligence to reduce the risk of loss and collateral exposure in event of a market crash.
Centred in the Cayman Islands, Crypto asset funds receive the advantage of tax and regulatory efficiency under one legal system. With no income, corporation, capital gains, estate duty, gift or withholding tax and Cayman not being party to any double taxation treaty. 50% of hedge funds have a majority investor base from Europe and the United States.
India, is not too far, with an increase in crypto asset-based hedge funds in India. These funds invest in blockchain-oriented start-ups and cryptocurrencies. CoinSwitch Kuber, a prominent Indian cryptocurrency investment platform recently raised $25M funding from Tiger Global Management with a valuation of over $500M. Currently, a major hindrance to the growth and influx of foreign investors in Indian Crypto focussed hedge funds is the regulatory uncertainty over treatment to private cryptocurrency. There are still major doubts looming across transactions related to private cryptocurrency after the introduction of the RBI issued digital currency. The Finance Ministry has stressed on the importance of blockchain and its requirement in the potential contribution to the economy of the country. The official Digital Currency Bill, 2021 gets tabled during the winter parliament session and that may have the much-desired clarity on regulation in India. Uncertainty seems to be reducing with governments noticing the potential, India can remain hopeful of SEBI and the RBI stepping in with reliable regulations for hedge fund investing in Crypto which will encourage foreign investors to step in with stability and reduction in the vagaries currently prevailing.
For further insights into the cryptocurrency sector please visit: https://tagbenchassociates.com/category/cryptocurrency/
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein.
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Sources – PwC, Economic Times and CoinTelegraph