Josh Gnaizda is the founder of Crypto Fund Research.
It’s one of the worst-kept secrets in the alternative investment industry: net of fees, hedge funds struggle to outperform broad equity markets.
In 2007, before bitcoin was even a glimmer in Satoshi Nakamoto’s eye, Warren Buffet famously bet a prominent fund of hedge fund manager $1 million that over the subsequent decade, an S&P 500 index fund would outperform any basket of hedge funds he could put together. Buffet won handily.
It’s not that Buffet didn’t think there were capable investment managers out there; Buffet’s Berkshire Hathaway has often been described as a giant hedge fund. Instead, his confidence relied on his intuition that between fees and trading costs, even the best hedge fund managers would struggle to beat a low-cost index fund.
We might logically assume that crypto hedge funds, which generally have a 2 and 20 fee structure similar to that of their traditional counterparts, would suffer a similar fate.
But since the beginning of 2017, when reliable data became available, the result has been quite the opposite. An equal-weighted index of crypto funds significantly outperformed bitcoin and most other crypto assets.
The CFR Crypto Fund Index tracks more than 40 crypto funds, mostly hedge funds, across a variety of strategies. It shows that even as bitcoin climbed about 1,000 percent between January 2017 and June 2019, crypto funds gained more than 1,400 percent.
The outsized performance of crypto funds over this period might puzzle the Oracle of Omaha, a man who once described bitcoin as “rat poison squared.” Even without Buffet’s bias against crypto or hedge funds,