Tech Transformers

Bitcoin is outperforming major assets but hedge funds are still staying away from the cryptocurrency

Key Points
  • Bitcoin's price has rallied as much as 180 percent this year but hedge funds are still nervous about investing.
  • One hedge fund veteran told CNBC that the industry doesn't "know enough about it".
  • But there has been rising interest from investors in other bitcoin products on the market.

hit an all-time high last week, marking a year-to-date rally of 180 percent and potentially stellar returns for those who bet on the cryptocurrency, but it appears hedge funds are still not ready to touch the asset class.

The lighter supervision and more sophisticated client base enjoyed by hedge funds, as well as their ongoing search for market-beating alternative sources of return, provide just some reasons why such vehicles would be expected to venture more boldly into the booming but narrowly understood market for cryptocurrencies.

Indeed, bitcoin's rally has far outpaced the , which is up 7.9 percent year-to-date, and the NASDAQ which has seen around a 15 percent rise. In the currency space, the euro has risen nearly 6 percent year-to-date against the dollar, while sterling is up around 4.2 percent. The euro and pound are the best performing major currencies so far this year.

Yet aside from dedicated vehicles set up with a sole or majority focus on trading cryptocurrencies, many hedge funds are still very reluctant to dip a toe into the asset class.

"To be honest, I just don't know enough about it," said a 16-year hedge fund portfolio manager veteran, who preferred to remain anonymous because he didn't want to publicly reveal investment strategy. This reflected the view of several people whom CNBC spoke to via phone and in person. Restrictive investment guidelines set internally was another reason cited by multiple managers.

Hedge funds' reluctance to invest really boils down to concerns over volatility, security and perception, according to Louis Gargour, founder of alternative asset manager LNG Capital.

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"Bitcoin's extreme volatility doesn't sit well with managers working on a risk-adjusted return basis. Furthermore, there are valid concerns that digital currency assets can be hacked or stolen. Finally, there's a perception that bitcoin remains a niche, retail investment that does not yet demonstrate sufficient quality to be seriously considered for many reputable institutions," says Gargour who has 25 years' of corporate bond experience and had experience at several of the biggest Wall Street names before starting his own fund.

There's also the issue of reassuring investors, added Gargour, who says clients are vastly more comfortable with knowing their money is invested in tangible or institutionalized assets, such as gold or equities.

A catalyst which could change the way cryptocurrencies are perceived and potentially open the floodgates for more hedge fund money is if the largest global banks provide services such as settlement for them.

"Clearing banks need to adopt these crytocurrencies as payment methods to pique widespread institutional interest," suggested Gargour, adding that its ease of transfer could indeed make it a preferable alternative for banks to the cumbersome process of wiring money.

With the firmer reassurance of such institutional backing, cryptocurrencies could then look more interesting to a broader investor base as potentially an alternative source of available credit risk.

Rising investment interest

Despite the current reluctance for hedge funds to get involved with bitcoin, there's a growing move to try to open up the cryptocurrency world to institutional investors. Cameron and Tyler Winklevoss, known for their lawsuit against Facebook founder Mark Zuckerberg, have been trying to get regulatory approval for a bitcoin exchange-traded fund (ETF). The U.S. Securities and Exchange Commission rejected the initial application but is now reviewing the decision after an appeal. If such a product were approved, it could make bitcoin more palatable for hedge funds to invest.

Chris Ratcliffe | Bloomberg | Getty Images

For now, there are ways to trade bitcoin through investment products. Companies like Global Advisors have a bitcoin fund that is listed on The International Stock Exchange on the Channel Islands (an archipelago in the English Channel), and Daniel Masters, a director at the company said that there has been rising interest from investors.

Global Advisors also has two exchange-traded notes (ETNs) listed on the NASDAQ OMX in Sweden. These allow people to buy a product that tracks the bitcoin price. Masters said that there has been large interest from major brokers buying the ETN on behalf of clients, showing a rising interest in bitcoin investment products.

"The interest is just going stratospheric," Masters told CNBC in a recent phone interview.

"If you look at the brokers we are now getting to participate, it's coming from over a dozen different sources."