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The Performance of Cryptocurrency Funds

October 17, 2021

By Daniele Bianchi, PhD, Associate Professor of Finance at the School of Economics and Finance, Queen Mary University of London.


Beginning with Jensen (1968), the ability of fund managers to create value for investors has become a heavily studied question in the academic literature, especially following the growing popularity of more passive and cheaper investment vehicles such as exchange-traded funds (ETFs). Despite the conventional wisdom, which holds that a search for securities that could possibly outperform the market may be worth the expenses required, the empirical evidence on the value of active management is mixed at best. Furthermore, such evidence is mostly focused on the US equity mutual fund industry. Perhaps more importantly, there is virtually no evidence on the value of active investment management in the fast-growing industry of digital asset investments. Do funds that specialize in digital assets creates actual value for investors adjusted for risk exposures? I seek to answer these questions in my paper, “On the performance of cryptocurrency funds”, available online.

Understanding the extent and the significance of the benchmark- and risk-adjusted performance of cryptocurrency funds might be particularly interesting for a few reasons. First, the fact that cryptocurrency markets have a highly fragmented, multi-platform structure, which is decentralized and granular, adds to the conjecture that there might be market segmentation, meaning digital assets and standard asset classes might not be exposed to the same sources of risk. This is relevant from an investment management perspective and could ultimately tilt capital towards crypto assets in search of high yields and/or diversification opportunities. Second, cryptocurrencies are a new and mostly unregulated asset class. This widens the investment scope and landscape to a variety of risk-taking behaviors. Third, disentangling “skill” vs “luck” in cryptocurrency markets is particularly challenging within the cryptocurrency investment space. This is due to a highly volatile and upward trending market trend and the presence of many outlying funds with extremely high risk-adjusted performances. All these aspects combined, make cryptocurrency markets a rather unique setting to investigate fund managers' performances and the value of active management more generally.

This research, which studies the risk-return profile of more than 200 funds that specialize in digital assets, shows that, when aggregating funds at the strategy level there is some evidence of superior fund performance compared to passive benchmarks such as a simple buy-and-hold investment in BTC, ETH or a value-weighted portfolio of the largest assets by market capitalization.  However, such performance is quite heterogeneous across strategies, and mostly focused on long-short and multi-strategy funds. In addition, Alphas tend to be higher and more significant when using pseudo-tradable risk factors instead of fully traded passive benchmark portfolios. Turning to the funds’ betas, the results show that (1) there are significant market exposures across funds and (2) Bitcoin plays the role of a “level" factor for the performance of crypto funds.

Similarly, delving further into the performance of individual fund performances, there is an even more striking evidence of performance heterogeneity. Across a variety of statistical tests based on bootstrap methods, our main results show that, after adjusting for passive benchmarks or the exposure to risk factors, a handful of funds show a performance which cannot be simply reconciled by “luck” or the exposure to common sources of market risk. That said, the quite high volatility and within-strategy correlation of the returns weakens some of the statistical power of the results.

As a whole, the results in this research advocate caution in giving a naïve interpretation of the dynamics of the performance of funds that specialize in digital assets. More specifically, although on average cryptocurrency funds outperform passive investment strategies, such performance is primarily concentrated in a handful of highly successful funds. Yet, the fact that the return dynamics is highly volatile and fund returns are highly correlated within a given investment strategy weakens the statistical significance of the results.

There is still a considerable debate as to whether and how cryptocurrencies may be segmented from traditional asset classes, and how this possibly translates into economic gains for institutional investors. This paper solidly contributes to the empirics of this debate, but there is still much to be answered.

The original paper, “On the performance of cryptocurrency funds”, is available online on SSRN and is freely available to all readers.

Watch this panel discussion, headlined by Dr. Bianchi, on analyzing cryptocurrency performance:

About the Author

Daniele Bianchi, PhD is Associate Professor of Finance at the School of Economics and Finance, Queen Mary University of London.