The Founder of Morgan Creek Digital, Anthony “Pomp” Pompliano, forecasts that cryptocurrency-oriented hedge funds will begin to close their doors. Further, Pompliano says regarding the bear market that “things will get much worse before they get better”.

There are two main factors that will cause cryptocurrency hedge funds to shut down according to Pompliano. First, there is something called a high water mark, which determines the salary of hedge fund managers. Basically, hedge fund managers only receive their performance fee, which is usually 20% of profits, if the fund’s net assets are higher than in any previous period. Due to this bear market, which has seen the price of Bitcoin decline from USD 20,000 to less than USD 5,000 in a year, practically no cryptocurrency hedge fund managers will get their performance fee, making their businesses much less lucrative.

Pompliano thinks cryptocurrency hedge funds will close down, be quiet for a few months or up to a year, and then restart under a new name. Since the market is at a very low point, closing an old fund and launching a new one will likely ensure consistent performance fees for fund managers.

The second factor that will cause cryptocurrency hedge funds to close down is the increasing Securities and Exchange Commission (SEC) enforcement in the initial coin offering (ICO) market. Recently, the SEC issued its first civil penalties against Paragon (PRG) and Airfox (AIR). Each firm was fined USD 250,000 and is being forced to return investments to investors who choose the option. Most ICOs have lost money and if the SEC proceeds to take this action against the rest of the ICO market, it could lead to widespread bankruptcy of ICO companies, according to Pompliano.

This will have a direct impact on cryptocurrency hedge funds, since many of the ICO investments they have on the books could quickly go to zero. Pompliano said, “As both ICOs and funds begin to shut down, it is easy to see a future feeling of panic and desperation spreading across parts of the market.”

On a positive note, Pompliano thinks once the bear market runs its course the market will be in a healthy position to rebuild. Specifically, he said, “Remember, bear markets get rid of the tourists so that the true entrepreneurs can focus on building sustainable value. Watch closely for the founders who are quietly toiling away with talented teams right now.”

 

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