Alpha, Beta, and Crypto Funds


HFR just debuted new indices aimed at blockchain and cryptocurrencies. HFR stands for Hedge Fund Research and the new indices measure the performance of twenty hedge funds investing in blockchain and trading cryptocurrencies.  So far this year, the HFR Cryptocurrency Index alone has risen 1,635%. But one must wonder if that performance is skill or just luck?

In the hedge fund world there is either alpha or beta returns. Beta returns are earned from just going with the market and don’t require great expertise. Whereas alpha returns required something extra, something more. If the S & P 500 Index is up 20% in one year, then you would want your hedge fund manager to earn more than that, but most do not. For in most professions there are the Jordans, Kanyes, and then everyone else.

Alpha returns in crypto may eventually come from some type of edge: a social network, a technology insight, or a trading acumen.

For example, former Fortress employee and macro  trader, Mike Novogratz, who made his $250 million crypto fortune from a “small” bet on ether back in 2016, will open his first fund next year, called Galaxy Investment Partners. Olaf Carson-Wee co-founded Polychain Capital with money from Andreesen-Horowitz  and USV. Carson-Wee’s edge comes from his social and intellectual capital developed as one of the first employees of Coinbase.

Recently Techcrunch founder, Michael Arrington, announced in late November his own fund focused on blockchain and crypto. As a former venture capitalist, Michael Arrington will be leverage his own social network and tech expertise. Out the gate, Arrington did score a first by establishing the first fund denominated in XRP, the cryptocurrency of Ripple Labs.  The XRP Capital Fund will only use XRP as investment from and redemptions to limited partners.

Since crypto funds are relative new, investors won’t really know for a while whether they’re paying for alpha returns from fund managers. It’s worth noting that most of the run up in the HFR Cryptocurrency Index came in 2017 when lots of new money flowed into the crypto-space.

So right now there might only be beta returns in the new crypto funds.