A report by PwC and Elwood Asset Management based on the 100 largest crypto hedge funds shows that as the price of bitcoin slumped by 72% last year the median crypto hedge fund lost 46%.

Median assets under management grew from $1.2 million in January 2018 to $4.3 million in the first quarter of 2019.

The average crypto fund had assets of $21.9 million with fewer than 10% of funds managing more than $50 million and more than 60% managing less than $10 million.

According to the report, there are currently only around 150 active crypto hedge funds which manage approximately $1 billion of assets, but this figure excludes index funds and venture capitalists.

Reflecting the relative youth of the sector, most crypto fund managers have comparatively little investment management experience of only three to four years on average.

In addition, a mere 25% of crypto hedge funds’ boards include independent directors.

The lack of proper governance structures makes it unlikely that institutional investors will invest in many of the crypto funds. “Having independent directors on the board of the fund is seen as an accepted fund expense. We expect crypto hedge funds to focus increasingly on fund governance as they look to raise capital from institutional investors,” the report said.

Institutional investors may also have reservations about the fact that just more than half of funds (52%) use an independent custodian.

Although custody is not as straightforward in the crypto space as with traditional funds, for which the use of independent custodian is the norm, there are hacking risks and regulatory concerns over managers holding client assets.

“Many crypto fund managers often use multi-signatory wallets, hot/cold wallet set-ups or other innovative ways to hold the private keys of the fund’s crypto assets,” the report said, adding that funds opting for a self-custody approach, must have the necessary inhouse tech and cyber expertise to design and monitor the self-custody set-up.

Investors will also expect to receive a monthly net asset value that is verified by an independent, reputable fund administrator. There is currently only a limited number of fund administrators servicing the crypto space and “being able to accurately value a crypto fund remains challenging”, the study said.

However, this is expected to change as the industry matures and established players become more comfortable with crypto assets.

Henri Arslanian, PwC Global Crypto Leader, said the crypto hedge fund industry today is where the traditional hedge fund industry was in the early 1990s. “We expect the industry to go through a rapid period of institutionalisation and implementation of sound practices over the coming years.”

The report’s authors expect many more ‘traditional’ asset management professionals to join crypto hedge funds in the short- and medium term.

Three quarters of funds analysed in the report can take short positions but only one third of funds uses leverage as part of their investment mandate. The report also found that most crypto managers shun third-party research with only 7% using it to inform investment decisions.

Bin Ren, CEO of Elwood, noted that the crypto hedge fund space is just one part of a much broader ecosystem of digital assets, around which there is increasing evidence of institutionalisation. “This broader interest from investors and regulators is undoubtedly a positive step towards digital assets being recognised as an asset class with true viability and longevity. However, in order for that progress to continue it needs to be accompanied by greater transparency and education, and this report is a step towards achieving that.”

More than half of the analysed crypto funds (55%) are domiciled in Cayman, followed by the US (17%) and the BVI (13%). Not surprisingly most of the fund management companies are based in the US (64%), with Cayman in second place (20%), ahead of Singapore (5%).

However, the location of the fund manager is misleading. While the investment manager that legally contracted with the fund may be located in an offshore jurisdiction, like Cayman, the team is often physically located in an onshore jurisdiction like Singapore or Hong Kong, the report said.

In terms of fees, the study found that the average fees for crypto hedge funds last year were 1.72% management fee and 23.5% performance fee.