Hedge funds grow more cautious on crypto after turmoil

(This July 11 story has been corrected to add 'CoinShares' in paragraph 2 and 'funds investing in crypto' in paragraph 4)

By Nell Mackenzie and Elizabeth Howcroft

LONDON (Reuters) - Global hedge funds not specialising in crypto assets have grown skittish from recent industry turmoil and this has lead to an exit from the sector, a survey showed on Tuesday.

The proportion of traditional hedge funds investing in crypto-assets has dropped to 29% this year from 37% in 2022, the report by PwC, CoinShares and the Alternative Investment Management Association (AIMA) said.

A quarter of those currently invested said increased uncertainty over U.S. regulation of the sector may lead them to reconsider the asset class altogether, it added.

Last year's market events affected investment decisions for over 70% of hedge funds invested in crypto. In total, 59 hedge funds were surveyed, which oversaw a combined $280 billion in assets, the report said.

The crypto industry was rocked last year by a series of bankruptcies at major crypto companies, including top U.S. exchange FTX. Investors were left with large losses as token prices slumped and various firms froze customer withdrawals.

While the price of bitcoin has steadily recovered this year, investors remain cautious as U.S. regulators have stepped up action against what they say is an industry-wide culture of not complying with the law.

"The digital assets space has had to reckon with short-comings in its fundamental operations, including risk management, as well as allegations of corporate malfeasance," AIMA Chief Executive Jack Inglis said in the report.

Traditional hedge funds that avoided trading in crypto said deterrents included reputational risk, a lack of clear guidance from regulators and tax authorities and unreliable data.

More than half of respondents not yet using crypto said they would wait for further updates regulating it, the report said.

Hedge funds that are invested in crypto mostly use bitcoin or ether. Hedge fund strategies investing in crypto-assets included multi-strategy (41%), systematic (29%), macro (12%) and equity (12%).

Almost half of hedge funds that were already trading crypto said they would put more money in, but that crypto only accounted for 2% of assets under management.

(Reporting by Nell Mackenzie and Elizabeth Howcroft; Editing by Dhara Ranasinghe and Alexander Smith)