Bye Investors: U.K.’s First Regulated Crypto Hedge Fund Closes Down

Prime Factor Capital was the first cryptocurrency-focused hedge fund to obtain a license from U.K. lawmakers. The move was heavily celebrated by the crypto community, as it meant a step closer to adoption.

Unfortunately for the founders, the fund is shutting down. Failure to attract enough investors has spelled doom for the fledgling firm. The March 2020 market crash may have put the final nail in the coffin.

From Prime to No Capital

Back in 2018, former employees of global investment firm BlackRock launched a new cryptocurrency-focused hedge fund.

They named it Prime Factor Capital Ltd. It was the first crypto hedge fund to win the seal of approval from the Financial Conduct Authority (FCA). U.K. regulators approved it as a full-scope alternative investment fund.

The fund was authorized to hold more than €100 million in assets under management. And although the fund caused great hype within the crypto community, it failed to attract institutional interest.

Cryptocurrency enthusiasts have been waiting for institutional money to jump on board for years. The theory is that if and when institutional investors do, crypto will have hit the mainstream. It looks like hardcore fans will have to wait a bit longer.

Prime Factor Capital has closed down all its operations despite solid returns, according to Nic Niedermowwe, Prime Factor’s chief executive:

“We can confirm that the fund, despite having delivered an average monthly performance in excess of 4%, is being wound down due to insufficient demand from institutional investors.”

The fund also failed to sell its fund management license to another cryptocurrency firm due to the volatility of the sector.

The State of Crypto Hedge Funds

Primer Factor Capital is hardly the first crypto-centric fund to close. During 2019, almost 70 cryptocurrency-focused hedge funds closed their doors.

cryptocurrency hedge funds closing by regions beincrypto tony toro
Crypto hedge funds closures by region in 2019. | Source: Cryptofundresearch.

Indeed, the number of crypto hedge funds peaked in 2017. And in 2019, the number of launched funds was dramatically lower than in previous years, sitting at just over 100.

cryptocurrency hedge funds openings by year beincrypto tony toro
Cryptocurrency hedge funds launches by year | Source: Bloomberg.

If this trend continues, crypto-specific, institutional investors may never come to the party. This trend may be explained, in part, due to the unregulated nature of the emerging industry.

The Bear Case for Institutional Money

The COVID-19 induced market crash of March 2020 certainly added some fuel to the fire. Cryptocurrency focused funds witnessed their second-worst monthly loss in nearly five years.

On average, they lost a hefty 27%. Mainstream hedge funds lost less than 10% on average, as crypto volatility added doubt to large-scale players.

crypto hedge funds average ft beincrypto tony toro
Crypto hedge funds average monthly gains and losses. | Source: FT.

Most institutional investors want to achieve stable returns and not have to endure wild swings. Cryptocurrency doesn’t suit this agenda, at least not in its current form.

As BeInCrypto reported back in April, crypto hedge funds saw returns of around 19.5%, outperforming the broader hedge fund market by 100% so far in 2020. Year-to-date, crypto hedge funds are up 13.4%. By comparison, mainstream funds only returned 6.7% within the same period.

The crypto market is performing like the stock market on steroids. When it goes up, it goes up higher, but when it goes down, it hits the floor. This wild west nature makes the digital asset class unsuitable for a dividend-driven trading mindset.

Institutional Money, Good or Bad?

After the 2017 – 2018 ICO madness, retail money headed for the exits as the bubble exploded. Crypto firms had to look for investors outside of retail, attempting to make their businesses appealing to venture capitalists and hedge funds.

According to Spencer Bogart, a general partner at San Francisco-based Blockchain Capital LLC:

“Taking a step back, I think some would argue that the levels of institutional adoption are disappointing or underwhelming but, of course, this view depends entirely on expectations.”

He adds:

“To me, the fact that there is any institutional adoption for Bitcoin

BUY NOW only 10 years into existence is a radical success and beyond what anyone could have imagined just 3 or 4 years ago.”

There’s an atmosphere of uncertainty, fuelled by global central banks printing money non-stop. Big investors are looking for protection against inflation, and many are turning to gold and other precious metals.

As BeInCrypto reported recently, gold bug Peter Schiff continues to punt the shiny metal, backed by mainstream media.

The appeal of precious metals, and the cheap price of other commodities like oil, might divert big money from crypto into the safe, old, boring hard assets.

Does a lack of institutional money make a bearish case for crypto? Or will the trend only attract additional retail investors? Only time will tell.

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As a leading organization in blockchain and fintech news, BeInCrypto always makes every effort to adhere to a strict set of editorial policies and practice the highest level of journalistic standards. That being said, we always encourage and urge readers to conduct their own research in relation to any claims made in this article. This article is intended as news or presented for informational purposes only. The topic of the article and information provided could potentially impact the value of a digital asset or cryptocurrency but is never intended to do so. Likewise, the content of the article and information provided within is not intended to, and does not, present sufficient information for the purposes of making a financial decision or investment. This article is explicitly not intended to be financial advice, is not financial advice, and should not be construed as financial advice. The content and information provided in this article were not prepared by a certified financial professional. All readers should always conduct their own due diligence with a certified financial professional before making any investment decisions. The author of this article may, at the time of its writing, hold any amount of Bitcoin, cryptocurrency, other digital currency, or financial instruments — including but not limited to any that appear in the contents of this article.

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