With the rapid expansion of the crypto market, institutional investors are increasingly seeking exposure to digital assets. This has led to the rise of crypto investment funds, which professionally manage crypto portfolios and attempt to outperform the market. But how well do these funds perform? Are there skilled fund managers who consistently beat the market? A recent study titled “Persistence and Market Timing Ability of Cryptocurrency Funds” published in Financial Management by Thomas Conlon, Diego Víctor De Mingo-López, and Andrew Urquhart explores these questions in depth.
The study examines the performance persistence and market timing abilities of cryptocurrency fund managers. It analyzes data from 215 actively managed crypto funds over a seven-year period (2017-2024) and finds that, on average, these funds generate significant abnormal returns, or “alpha,” beyond what passive crypto investments can achieve.
Key Findings:
- Positive Alpha: The average crypto fund delivered an annualized alpha of 21%, meaning these funds produced excess returns beyond standard crypto market movements.
- Performance Persistence: The study found that funds that performed well in the past continued to do well, indicating that some managers possess genuine investment skill rather than just benefiting from luck.
- Market Timing Abilities: Some fund managers were able to adjust their exposure to crypto market volatility effectively, increasing risk in bullish markets and reducing exposure in bearish conditions.
How crypto funds generate returns
The research assessed fund performance using a one-factor model, which compares fund returns to a market benchmarkTo measure fund performance, the authors employ a one-factor model where abnormal returns (alpha) are estimated relative to the S&P Cryptocurrency Broad Digital Market (BDM) Index, with the 1-month U.S. Treasury Bill rate used as the risk-free rate. The analysis is conducted using rolling 12-month regressions, ensuring that the persistence of fund performance is assessed dynamically over time. To test for market timing abilities, the study applies two established models: the Treynor-Mazuy (1966) quadratic model, which detects whether fund managers increase risk exposure in bullish markets and reduce it in bearish periods, and the Henriksson-Merton (1981) model, which examines if fund managers successfully anticipate positive and negative market movements. Additionally, the researchers sort funds into quintile-based portfolios based on past performance and timing ability, allowing them to observe persistence in returns and determine whether fund managers’ timing skills translate into sustained outperformance.
The results showed that 27% of funds achieved statistically significant positive alphas, meaning they consistently outperformed the broader crypto market. The best-performing funds delivered an annualized alpha of over 60%, suggesting that some managers possess superior investment skills.
The role of market timing in crypto fund success
One of the most interesting findings was that successful crypto fund managers exhibit strong market timing abilities. The study found that:
- Fund managers in the top-performing category increased exposure to crypto assets when market conditions were favorable.
- They reduced risk during market downturns, helping protect investors from heavy losses.
- Timing skills were persistent over time, meaning managers who demonstrated market timing success in the past continued to do so in future periods.
Implications for crypto investors
For investors considering crypto funds, this study offers valuable insights. While not all crypto funds outperform, those with a strong track record of generating alpha and demonstrating market timing abilities can provide superior risk-adjusted returns. Investors should look for funds with consistent past performance and strong risk management strategies to maximize their returns.
The research highlights the potential of actively managed crypto funds in an evolving market. As institutional adoption grows and crypto markets mature, skilled fund managers will play a crucial role in navigating volatility and capturing alpha.
For those looking to invest in the crypto space, understanding fund performance metrics and market timing abilities can be key differentiators in selecting the right investment strategy. The crypto industry is still young, and as more data becomes available, we may see further refinements in fund management strategies that push the boundaries of performance even further.
Why is this important for India?
As per publicly available information, Indian fund managers have either zero or negligible investment in crypto funds. The same goes for the retail investors, with the exception for those who trade in individual capacities through exchanges. In the past few years, there have hardly been any applications to the capital market regulators for allowing any such products as well. Overall, the Indian investor is aloof from this developing global trend. The presence of actively managed crypto funds could provide Indian investors with a structured way to gain exposure to digital assets while mitigating risks through professional management. Furthermore, as Indian investors seek diversification beyond traditional asset classes, identifying funds with strong past performance and market timing abilities can lead to better investment decisions.
With increasing data becoming available on market performance and developing global regulatory landscape, our market regulators and fund managers should decide on a roadmap for making such products available to the Indian citizen. Without such an approach, either our citizens would be isolated or would be indirectly pushed towards avenues which might be more dangerous and totally unregulated.
Disclaimer : This does not constitute investment advice. Always do your own research before making an investment decision.
