Despite a Record Year in 2020, Hedge Funds Struggle to Keep Pace with Bitcoin

With no shortage of high-performing stocks, 2020 was a very strong year for risk assets. But even with historic returns, none came remotely close to Bitcoin.

The HFRI Fund Weighted Composite Index 2020 return was 11%, making it the highest-returning year since 2009, according to HFR. The Nasdaq also registered its highest annual gain since 2009 with a 43.64% return in 2020. The S&P 500 closed the year 16.26% higher.  

Bitcoin’s 2020 return was more than 200%. Ethereum did even better with returns just shy of 500%. 

“Hedge funds have, as a group, experienced a long period of underperformance,” said Lyn Alden, founder of Lyn Alden Investment strategy. “In particular, 2020 was a year where the most expensive and unprofitable companies were some of the best performers, becoming even more expensive based on most metrics.”

Even though Bitcoin’s market capitalization now exceeds $630 billion, it remains dwarfed by the S&P 500’s market cap at $31.61 trillion. As of the third quarter of 2020, total assets under management for the hedge fund industry was around $3.4 trillion, according to data from BarclayHedge. 

“It’s structurally just much easier for Bitcoin to outperform because it’s so much smaller,” said Kyle Samani, managing partner at Multicoin Capital. “It will run up more than everything else because it’s starting from such a smaller place.” 

Others point to Bitcoin’s latest run as a result of a weakened dollar and heightened inflation. Paul Tudor Jones notably said that Bitcoin will be a winner in this market, referring to the largest digital currency as the “fastest horse” in a May 2020 letter to investors. 

“Cheap money is going to make the S&P 500 go up, it’s going to make gold go up, it’s going to weaken the dollar, it’s going to keep the VIX subdued and Bitcoin is going to outperform all that,” said Travis Kling, founder and CEO of Ikigai Asset Management. “You saw that play out in 2020, and the expectation is for that to continue, at least through this year.” 

Now backed with a more robust price history, Bitcoin is gaining credibility in the minds of institutional investors. Hedge funds and corporations have shown increased interest in having a non-zero position in Bitcoin in recent months, and the momentum is likely to continue. 

“The argument for a non-zero Bitcoin position gets clearer over time, because among those large pools of money, the point is that even a small position can go a long way towards improving upside potential, without adding much risk to the portfolio,” said Alden. “A number of family offices have also been involved with venture capital funds, supporting the industry in ways besides just holding the tokens.”