According to Bloomberg, Bitcoin's notorious price fluctuations are proving to be profitable for quantitative hedge-fund investors and academic researchers. A growing body of research, including studies from the world's largest publicly traded hedge-fund manager, Man Group Plc, and the University of Cambridge, suggests that the quant strategy of trend following is particularly effective for Bitcoin's price volatility.
Quant funds such as the $2 billion Florin Court Capital LLC have been using these strategies since 2017, and their cross-asset performance has been enhanced by crypto exposure. Researchers at Man Group's Man AHL unit found that a proxy long-short trend strategy in both Bitcoin and Ether has outperformed buy-and-hold investments in the coins since 2017 when scaled for 10% volatility. This strategy captures gains during a rally and takes short positions when the trend is negative.
However, there are challenges to this approach. The relatively small crypto data sets are cited as a barrier to broader implementation of systematic trading. Furthermore, the models Man Group uses rely on data starting in 2016-2017, when institutional investors became more active in the space.
The trend-following strategy is not only being examined by sophisticated hedge funds but is also going mainstream. Investors can now access a similar strategy through an exchange-traded product. This product dynamically allocates between Bitcoin futures and Treasury bills with a maturity of one to three months. The ETF increases exposure to Bitcoin futures when prices rise and reduces its allocation when prices fall, without ever going short.
Despite the promising results of trend following for Bitcoin and Ether, quants remain cautious about applying these systematic techniques elsewhere in the crypto space. Stablecoins, which are intended to track an asset like the US dollar one-for-one, are obvious examples. So are the highly speculative, often-novelty tokens known as memecoins, which can be much more volatile than Bitcoin and Ether.