Investors are shying away from crypto hedge funds as the collapse of FTX kickstarts a contagion that has rocked the digital assets space.

The ripples of FTX’s collapse have spread quickly across crypto. On 28 November, BlockFi became the latest firm to file for bankruptcy amid significant exposure to the fallen exchange.

Yet another bankruptcy has jolted investors’ confidence further. Fearing more crypto collapses, investors are taking a cautious attitude to crypto hedge funds, according to sector leaders.

“At this stage, nobody really knows how far the effects of [FTX] will go,” Marc P Bernegger, co-founder of crypto hedge fund AltAlpha Digital, told Financial News. “Most investors are very reluctant to invest in crypto hedge funds in these turbulent times and are waiting on the sideline.”

Carlos Gomez, chief investment officer at Belobaba, a cryptoasset fund, told FN that the root cause of BlockFi’s bankruptcy was the lack of risk management procedures.

“They should have been more diversified,” Gomez said.

The crypto market has lost more than $2tn in market cap since November 2021 in one of its worst-ever corrections. As rising bankruptcies force hedge funds to shift to decentralised platforms to reduce risk, investors’ confidence remains shaky.

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According to CK Zheng, chief investment officer at ZX Squared Capital, crypto hedge fund investors are still uncertain about how many more forced liquidations will be triggered after the collapse of FTX and BlockFi.

Crypto hedge funds Ikigai Asset Management and Galois Capital took major hits from the FTX collapse — another potential cause for investor concern.

“What may shock some people is that hedge funds haven’t been doing anything particularly clever,” Tom Rodgers, head of research at ETC Group, said. “There have been a bunch of funds that have gone on Twitter and said they lost funds that were frozen in FTX.”

The FTX and BlockFi collapses exposed poor risk management at crypto hedge funds. Failures at the likes of Three Arrows Capital and Alameda Research have also shown that the industry needs proper controls to survive the crypto winter.

“Everyone is a genius in a bull market. And when the tide goes out, as it has here, we find out not just who has been swimming naked, but who has a totally unsustainable business model,” Rodgers said. “2023 will be a pretty dark time for crypto hedge funds.”

To contact the author of this story with feedback or news, email Bilal Jafar

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