It’s cryptocurrency hedge funds’ turn in the regulatory spotlight.
The US Securities and Exchange Commission (SEC) will examine dozens of cryptocurrency hedge funds, which are known for their risky trading strategies and higher fees versus traditional investment funds. Regulators want to make sure as many as 100 crypto hedge funds are delivering what they promise to investors, according to a report in The Wall Street Journal.
Private hedge funds are not new to SEC scrutiny, as the sophisticated trading strategies have kept them on the radar of regulators before. For instance, fund managers must be careful how they market their funds, as the novice investor might not understand the risks they are inheriting with such trades.
One popular strategy is long/short, in which fund managers bet both on the prospects of a stock’s rise and its decline, adding layers of debt to the trade. This strategy recently made its way to hedge fund investing, with firms like Genesis Capital lending bitcoins to institutional investors for short-term trades, giving fund managers hedging capabilities in the cryptocurrency market.
In the United States, only accredited investors are allowed in. The SEC already has hedge funds with more than USD 150 million in assets under its purview, but it has the jurisdiction to poke any private fund it wants to.
Meanwhile, the SEC has already been cracking down on initial coin offerings (ICOs), including a number of them that are being investigated by the Wall Street regulator. Now it’s expanded the scope of its effort, as it looks to protect investors from deals that seem to circumvent securities laws.
According to the WSJ story, regulators appear to merely be looking for how their policies could apply to bitcoin hedge funds. If they notice anything sketchy, of course, they could take further action.
Chief among the SEC’s priorities is to ensure that hedge funds are delivering the type of exposure that fund managers outline in their investment papers. Another worry is the risk of a security breach in digital wallets at an exchange, such as the one that rattled Japan’s Coincheck in January in which hundreds of millions of NEM were hacked.
Hedge funds could begin to hear from regulators about the process in Q2.
Hedge Fund Performance
Hedge funds more broadly had losses in February, and cryptocurrency hedge funds were no exception.
According to HFR, which tracks hedge fund performance and also has its own blockchain index, cryptocurrency hedge funds managed to recover from their lowest levels last month, during which time the blockchain index shed 9.5%.
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