The depths of this year’s cryptocurrency bear market evidently show significant signs of further trouble. According to notable crypto figure and Morgan Creek Digital founder Anthony Pompliano, significant price drawdowns this year could lead to crypto hedge funds closing up shop soon.
Pomp specifically mentions crypto hedge funds and “high water mark issues”. Put simply, fund managers receive a commission based on their performance, in relation to associated crypto asset prices for each investment period.
Last investment period ended in December 2017, concluding a very lucrative year for crypto assets as a whole.
However, this year is a much different story. “We have seen 50-80% decreases in net asset values in some funds since then. This means these fund managers will not receive a performance fee in 2018, which drastically reduces the income of the individual manager”, Pomp explained.
With reference to the numbers, earning these manager’s next commission’s will also be difficult. They will need to more than double their fund’s net asset value from present-day prices.
Pomp explains many fund managers may simply close shop and return investor finances. They might then wait months or possibly a year to open a fresh fund with different parameters.
Pomp posed a question on why these funds have not yet closed, concluding that – “[t]he most plausible answer is that many of the managers are young/inexperienced and they won’t realize the issue until they don’t receive their performance fee for 2018. If true, we could be less than 60 days away from many of the fund managers experiencing the pain of being ineligible for the bulk of their compensation”.
Pomp also mentions ICOs, referencing their exuberant funding successes over the past year or so.
ICOs are now facing significantly more scrutiny from regulators. Previous ICOs could face fines, as well as requirements to refund investor funds at original ICO price, in original USD value.
The hitch here is the fact that most ICOs raised funds via cryptocurrencies. With prices down as much as they are currently, these ICOs could owe investors more money in USD than they currently own.
In short, ICOs may not have the money to pay back investors, due to holding assets that have plummeted in price.
These ICOs may need to file bankruptcy, leading to fund managers potentially seeing further losses.
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