Last Updated on Apr 17, 2020 by James W

Every week the financial news section is dominated by articles about cryptocurrencies. Financial experts predict that cryptocurrency will completely replace fiat currency in the near future. Digital assets are already very popular, but they also very controversial, due to their volatile nature. Nonetheless, crypto hedge funds are on the rise, and if you are interested in playing the digital assets market, you need to understand how these funds work, and how you can make the most of them.

What are crypto hedge funds?

As most of you already know, a hedge fund is a domestic or offshore investment fund. It generally runs as a private limited partnership dealing with borrowed capital used for different strategies like equities or convergence trading. A crypto hedge fund works in a similar manner, the main difference being the fact that it invests in assets that belong to the blockchain landscape. Most funds invest in Bitcoin, Ripple or Ethereum, but also in emerging blockchain assets. Currently, there are over 200 crypto hedge funds in the world, and they manage over $4 billion.

How crypto funds work

An average investor who is new to the crypto world will have a hard time investing in this market, because you need to do a lot of research to minimize your risks. These funds usually run as specialized investment companies. To raise a fund, a manager must develop a detailed thesis and put together a team for accomplishing the fund’s goals. By working with a team of financial experts, these funds are able to perform research in a much more structured and comprehensive way than an average investor.

These funds appeal to startup managers, but also to major institutional investors. Since these organizations have complex compliance standards, it is hard for them to enter the crypto market without help from blockchain experts. By investing in hedge funds, they can easily play the crypto market, with their preferred currencies, without having to deal with currency conversions or complex transaction procedures.

Crypto funds also have diverse strategies, and the line between a crypto hedge fund and a crypto venture fund is very blurry, and even inexistent in some cases, as there are several such funds that use both strategies.

Tips for startup crypto hedge funds

Due to the volatile nature of crypto assets, these hedge funds require careful planning and skilled experts. A proper strategy should follow the following guidelines:

  • Raise sufficient capital – The necessary capital is determined by the fund’s expectations, the size of the team managing the fund, the investment partners and the fund’s cost structure.
  • Put together the right team – The team is essential for the fund’s success and it should be comprised of skilled traders with plenty of experience in managing private or accounts or fund trading.
  • Choose the best partners – Hedge funds require several service providers like administrators, prime brokers, placement agents, attorneys and auditors. These services are essential for the fund to operate properly, and they also have a big impact of the fund’s reputation. For a successful fund formation, you should work with a reputable global fund service like Stonegate. The Stonegate Cryptocurrency Fund Formation services cover the full range of services required in the crypto world, from fund structuring to regulatory compliance, investor services, online reporting and much more. Stonegate is known for actively engaging with the key players of the digital financial market, and they provide the full range of financial services required in this industry. They have hundreds of clients spread across the world, so they have a valuable insight on the regulatory environment of international jurisdictions.
  • Choosethebest cost structure – The cost structure is determined by the fund’s investment strategy. If you work with reputable service providers, they can help you choose a structure which is both cost efficient, and profitable for the fund’s investors. Moreover, the fund must also rely on an efficient tax structure. Most domestic and offshore hedge funds usually work as limited partnerships.
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