(Bloomberg) -- As the “to the moon” refrains quiet down, crypto is seeing increased demand from hedge funds in a trading strategy that does not take directional views on the market.

There’s no question that 2022 has been a tough year for crypto: Bitcoin’s down 50%, and digital assets have shed more than $1 trillion as central banks around the world tighten monetary policy to combat inflation. But funds like Miami-based BlockTower Capital and Nickel Digital Asset Management, which utilize so-called market-neutral strategies, said they are still notching positive returns.

BlockTower Capital’s market-neutral fund, which manages more than $100 million, has about a 3% return so far this year. And London-based Nickel Digital, with $300 million in assets under management, advanced 0.49% in May when the collapse of Terra sent shock waves throughout the rest of the market and dragged a wide-encompassing index of digital assets down 25%. 

“This strategy sometimes might not look as attractive during a bull market where Bitcoin’s up 70%,” Rahul Rai, co-head of market neutral at BlockTower and former FX trader at Morgan Stanley, said in an interview. “In a bear market especially, the strategy really stands out. We’re absolutely seeing a lot of investor demand.”


The teams behind both firms include experienced traders from Wall Street, as the strategy has long been deployed in the equity market. Ken Griffin’s Citadel, for instance, booked a 7.5% return with its market-neutral strategy as US stocks posted losses of nearly 9% in April.

Nickel Digital’s CEO and founding partner Anatoly Crachilov, who left Goldman Sachs in 2019 to pursue crypto, said that with hundreds of trading venues operating 24/7 around the world, the arbitrage opportunities to trade on price differences for the same token are abundant. It’s also a strategy that dates back to the early beginnings of crypto.

In contrast to US markets, “there are more than 400 exchanges out there and every single one of them trades Bitcoin, which means now you have multiple venues and very likely prices will be asynchronized for various reasons,” he said.

Still, Crachilov expects the annualized returns from the market’s inefficiency to come down to 8-10% over time as crypto matures. His firm posted a return of around 15% in 2021.

Since last year, the market-neutral strategy has grown into one of the most popular types of trading methods, according to an April survey by accounting giant PwC. However, market-neutral funds, with an average return of 37% in 2021, underperformed other strategies -- including certain long-only ones that notched average gains above 400%.

Olwyn Alexander, global asset and wealth management leader at PwC Ireland, said the relative performance of market-neutral funds would stand out in today’s environment compared with directional long-exposure funds.

“Directional strategies are obviously best during a bull market -- if you bought Solana early on and sold it at the peak, you might have made 1,000%. It’s more about timing. Market-neutral strategies aren’t going to touch that,” said Michael Safai, co-founder and partner at proprietary trading firm Dexterity Capital. “We’ve been doing this for five years, and for us, it’s a long game, where we can always make money no matter what the market is doing.”

Though there are a number of different market-neutral strategies traders can deploy, “you’ve done pretty well if you’re in the neighborhood of 20-30%,” Safai said. “But you can do better than that if you’re clever.” 


Beyond taking advantage of market inefficiencies across centralized trading venues, another crypto-only market-neutral strategy can be found within decentralized finance, a fast-growing experimental sub-sector of crypto that became popular over the past two years.  

BlockTower’s Rai said his firm is actively looking for returns in DeFi, but acknowledged that DeFi faces increased criticism due to the collapse of the Terra blockchain and the billions of dollars that have been hacked in the nascent sector. 

Celsius, a crypto lending platform, paused withdrawals and other activities for its users recently, after many in the market questioned the firm’s investment in DeFi.

Rai said his firm had “no material losses” through Terra’s meltdown, since it saw the warning signs early on.

“What a savvy fund manager has to do is evaluate -- given the return profile -- is it worth taking on these risks? And what is the risk-adjusted return?” he said. In DeFi, “these risks are uncorrelated to the broader market. A smart contract getting hacked has no correlation to what the S&P 500 is doing or what Bitcoin is doing. It’s an idiosyncratic event.”

©2022 Bloomberg L.P.