With the rising popularity of cryptocurrencies such as Bitcoin and Ethereum, it is probably only a matter of time before hedge funds begin investing in digital currency, perhaps through exchange-traded funds ETFs. But this may not be the wisest way to try and cash in on the crypto goldrush. A study recently published by Coindesk suggests that the expenses that hedge funds entail will not be in your favour when it comes to investing in cryptocurrency.
Coindesk worked out the costs and how much an investor would lose on a $100,000 hedge fund investment which included a 2% annual management expense and 20% share of profits, otherwise knows as the "incentive" fee. The study reads, ”the typical management fee is 2 percent on every dollar you invest. Let's say you've found a fund with a solid strategy, and it has a minimum investment of $100,000. This means you would get charged $2,000, meaning you're only 'putting to work' $98,000 in the investment.”
With all hedge fund investment, a significant fee goes to the fund manager's pockets. It may seem as though $2,000 doesn't sound a lot but in investment terms, it can turn out to be very significant, particularly in a market, like cryptocurrency, where it has been proven there are historical benefits to holding.
If the fund you invested in then succeeded in generating a gross return 10%, after management fees, were charged it would be $9,800, and after the 20% fee charged that would mean another $1,960 in fees is lost. In total, this would all work out to $3,960 in fees on an investment through a hedge fund. After all management and incentive fees are charged, an investor would make a $7,840 net return on a $100,000 investment, a 7.84% rate of annual return.
Although investing through a hedge fund has benefits in term of time and convenience, they also some come with significant costs. Going it alone may not be for everyone - you should at least know exactly what you are getting into and the slice that will be trimmed off your return when using a hedge fund for investing in the digital currency market.