What are cryptocurrency hedge funds, and how do they work?

A hedge fund is an investment fund where capital from various institutional and individual investors is combined and put toward a range of assets, including derivatives, stocks, bonds, commodities and foreign currencies, with the aim of optimizing returns.

Hedge funds, in general, operate as limited partnerships, professionally managed by fund managers who pool money from investors. However, participation in hedge funds, including those dealing with cryptocurrencies, is typically limited to high-net-worth individuals who can bear higher management fees and associated risks.

Crypto hedge funds generate revenue through an annual management fee, typically ranging from 1% to 4% of the invested amount. In addition, investors may also be obligated to pay a percentage of earned profits as performance fees to the managing team.

Crypto hedge funds employ a combination of systematic and discretionary investment strategies to effectively navigate the crypto landscape. The systematic approach relies on computer transaction processing models, offering a structured framework, reducing emotional influences and providing consistency. However, the risk lies in the potential vulnerability of these algorithms to unforeseen market conditions.