This article uses the 21e6 Crypto Fund Database as a basis to map out the current state of crypto funds in June 2023.
Authors: Jan Spörer, Maximilian Bruckner
Crypto hedge funds fall outside the highly constrained regulatory regime that retail-ready mutual funds are subjected to. Therefore, these funds are usually not available to retail investors and require certain minimal investment sizes typically not available to retail investors.
Two reasons why crypto funds are not “retail-ready”
There are two main reasons why crypto hedge funds can only be distributed to professional investors. First, these funds often utilize custodians and trading venues that do not fulfill the regulatory requirements of the countries that can “passport” to retail investors. This may change in the future, with some jurisdictions creating regulations surrounding digital asset custody. Second, the strategies employed by these hedge funds frequently come with market and counterparty risks that are not deemed acceptable by regulators to be taken by retail investors. Professional investors, on the other hand, have sufficient experience to properly assess these risks themselves.
How do crypto funds decide upon minimum investment sizes?
Different jurisdictions and different laws within these jurisdictions may imply varying investment minimums for restricted investment vehicles. Some laws only require investors to verify that they are qualified counterparties, other laws require explicit investment minimums per investment into a professional-only vehicle. Depending on the target group of the fund, the fund may thus choose different overall minimum investments or set investment minimums according to where the investor comes from.
The most common investment minimum is USD 100k, as seen in Figure 1. Most jurisdictions accept this as a sufficiently high investment amount that indicates the professionalism of an investor. As hinted at before, the knowledge of an investor, the investor’s investment track record, and the investor’s net worth are also taken into account when assessing whether an investor is eligible for a crypto fund investment.
Funds may set minimums even higher than legally required to increase the average investment size. This can lower the administrative burden of the investment manager and potentially also be a tool to increase the overall size of the fund (if investors accept to invest higher amounts than they initially planned on investing). On the contrary, funds may try to keep investment minimums as low as possible to make their fund more accessible and in the hope of follow-up investments.
The bear market has caused managers to reconsider their minimum ticket sizes
We have observed that some funds have reduced their investment minimums. This was not a broad-based movement, as many funds have already operated at the USD 100k minimum that is recommended in many jurisdictions. We have seen funds with very high minimums (USD 1m) come down to more moderate levels (USD 500k). Additionally, we see continued strength in the market for managed accounts strategies, many of which offer investors access to multiple strategies while only being subject to an aggregated investment minimum.
Fund of hedge funds enable investors to diversify easily
An investor with a USD 10m net worth that wants to invest a maximum of 3% in digital assets may not be able to invest in a diversified pool of promising crypto hedge funds. Such an investor would not want to allocate more than USD 300k to crypto funds. The issue is that these funds usually come with investment minimums between USD 100k-1m. Therefore, crypto fund of funds are a way to maximize diversification, even with moderate investment amounts. The given investor could take advantage of the pooling inside a fund of funds and be exposed to more funds than otherwise possible for him, with a minimum investment amount manageable for them.
Outlook: Could regulation impact minimum investment sizes?
We have occasionally followed discussions in the US about a potential change to investment restrictions for retail investors. One of the proposals is to allow retail investors to take a test to verify that they are knowledgeable — even if they do not have the net worth or the minimum investment requirements that are common today. If such regulations come into place, investment minimums for cryptocurrency funds may come down. Given the current anti-crypto regulator sentiment in the US, we do not expect this development to materialize in the digital asset space within the next years.
Another development to watch is the recent turmoil during the crypto winter. Funds may be more accommodating to investors and lower their minimum investment requirements whenever they are legally allowed to do so. Some investors have lost money and can only allocate smaller amounts to crypto than before. We will watch the space and see if this prospect will materialize.
Investment minimums in crypto hedge funds follow the same mechanisms that we know from hedge funds from traditional asset management. The main thing to watch is whether there is a regulatory change in the treatment of retail and semiprofessional investors in the US and in the EU.
21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products.
Please find more information about our authors on our homepage: 21e6.io
Jan Spörer is Due Diligence Manager at 21e6 and responsible for overseeing the content quality management of the 21e6 Crypto Fund Database.
 21e6 Crypto Fund Database, https://cryptofunds.21e6.io/