Crypto Hedge Fund: How to Deal with Volatility for Better ROI

crypto hedge fund

2011 marked a milestone in the world of crypto. The famous Bitcoin hit a record valuation – of $1.

It might seem like nothing today, of course, since the current cryptocurrency market has a value of over $800 billion. But what that history demonstrates is that crypto has seen staggering growth.

It’s a tempting prospect for any investor.

If you are ready to put your money in crypto, one option is becoming increasingly popular: the crypto hedge fund.

Yet before you part with your money, make sure you know a few facts about how these funds handle market volatility. Read on to learn how to deal with volatility in crypto hedge funds for a better ROI.

Crypto Markets and Volatility

You have probably seen crypto markets described as volatile.

But what does that mean? Inherent volatility is an important financial concept to understand. It will help you make more informed decisions. Here is a brief introduction.

What Is Volatility?

In financial circles, the term volatility means prices of assets change often. Those changes are significant and dramatic. That could mean extreme highs or extreme lows.

If you look at this on a graph, high volatility might look like a set of very steep hills. Conversely, an asset with low volatility may have flatter curves. It may gradually change, but the ups and downs will be slow and steady.

Volatility is a vital metric for financial investors. It helps determine the risk of an asset and shapes decision-making.

Causes of Crypto Market Volatility

The crypto market is highly volatile.

That means prices are unpredictable. You could buy and see your asset skyrocket in value quickly. But the opposite is also true. You could lose significant money and fast.

So why is crypto so volatile? There are several reasons.

First, it’s new and vulnerable to lots of regulation. Governments globally lack the same level of control over crypto as you see in other financial markets.

Second, crypto technology is new and advancing rapidly.

That constant change means you could buy one crypto asset because of the underlying technology. Yet within months, you could find another currency supersedes that with another innovation.

Market activity is the other driving force for this volatility. The market has lots of risk-seeking investors, and there is lots of trading happening. When that currency is new, large, and frequent trades cause high volatility.

Traditional Markets Vs. Crypto

Traditional markets go through periods of volatility, but not on the same scale. They are more predictable.

They have other factors helping to keep prices stable.

That might be global or political forces, such as government quantitative easing. It could be the stability of large and well-established companies with predictable profits.

It’s also shaped by the types of investors in these markets, like massive managed pension funds. They are risk-averse, and their trading patterns are more predictable.

Crypto Hedge Funds

We’ve established that crypto assets are volatile. Yet you can take steps to help reduce the risk and improve your ROI. One such step is a crypto hedge fund. In this section, we’ll explain what this is.

What Is a Hedge Fund?

A hedge fund is more traditionally seen in other financial spheres like stock markets.

These funds pool capital from many investors. They use diversification strategies to help balance the asset portfolio.

Diversification means spreading your investment across different assets. Those assets don’t all follow the same fluctuation pattern.

A diversification strategy helps reduce volatility. Even when one asset goes down, the others could remain stable or go up. It means the fund can deliver growth even when market conditions aren’t optimal.

Funds use other strategies aside from diversification to help improve overall performance. That includes short-selling, derivatives, and leverage.

Traditionally, hedge funds supported high-net-worth individuals and institutions.

Crypto Hedge Funds Vs. Traditional Hedge Funds

Crypto funds follow the same basic principle as traditional hedge funds. They pool capital and spread the investment to lower risk and reduce volatility.

However, crypto funds specifically invest in cryptocurrencies and digital assets. They don’t mix investments with other types of assets, such as stocks.

These hedge funds also face different challenges. They need to track and manage regulatory changes affecting the crypto space. The investments are also shaped considerably by technological change.

Plus, all assets in a crypto hedge fund operate in a fast, rapidly changing market.

Crypto Hedge Fund Strategies for Managing Volatility

Hedge fund managers have many strategies they can use to offset the natural volatility in the crypto market. Here, we’ll explore tactics and why they help boost profits and lower risk.


Hedging is a risk management strategy in financial investments. Hedging means you offset potential losses by making an opposing investment. It doesn’t necessarily boost profits, but it minimizes losses.

It’s almost like a form of insurance, helping to cushion you from the full effects of a steep downturn. In crypto, hedging could mean investing in one coin and investing in another crypto asset with an opposing pricing trend.

In other words, if one asset drops, the other is likely to rise or remain stable. Hedging is an essential shield against volatility. It will be one of the preferred strategies of any hedge fund manager.


Diversification is different from hedging. It doesn’t mirror an investment with an opposing force. Instead, it spreads the risk by investing in a variety of assets.

Diversification is one of the oldest and most successful ways of managing risk in financial investments.

In a Crypto hedge fund, that could be investing in a mix of coins. You might pick well-established currencies like Bitcoin and add emerging higher-risk coins.

It cushions against the performance of one asset. It provides more stable returns.


Derivatives are financial assets derived from an underlying asset. It’s a way that investors can hedge their funds. For example, a future allows you to buy or sell at a fixed future price.

Options are similar, offering the right to buy.

It means traders can profit from price changes without investing in the asset. So you can use them as hedging investments. The derivatives market is ever-evolving and sophisticated.

It’s continually bringing out new financial tools that can help better manage risk.

How to Choose a Crypto Hedge Fund

Now that you understand what hedge funds offer, your next step is to choose a fund. You want one that will help boost your ROI and manage crypto volatility. Here are some factors to consider when evaluating funds.

Past Performance

Use historical performance data from a hedge fund to establish whether it’s right for you. A strong track record for a crypto hedge fund is a valuable indicator that it will likely continue to perform well in the future.

You want to see a consistent record of high returns. Pay particular attention to returns during a crypto crash or downturn. This analysis will help you see if the fund has adequate risk management to handle a volatile crypto market.


The hedge fund team will make investment decisions on your behalf. Therefore you must do your due diligence and research the skills and experience of that team.

You want to know a bit about the fund manager and the broader operational and management team. That ensures you have sound financial experts and trusted leadership overseeing the investment strategies.

A good team will have a combination of market knowledge, technical expertise, and a systematic approach. Most importantly, they need to be industry experts in crypto. Experience with other hedge funds is also vital.


You will want to keep track of the performance of your investment. So you need a hedge fund with transparent and comprehensive reporting. It will help you make decisions about your money.

It will also give you valuable information about how the team manages your money. So if you aren’t comfortable with how the hedge fund performs, you can move your money elsewhere before you make a loss.

Risk vs. Reward

Crypto investments are highly attractive to many because of the possibility of huge gains. That’s the upside of high volatility.

If you time things well and make a good crypto choice, you could enjoy a surge in the value of your investment. So with the risk of crypto comes a higher reward.

Let’s examine this further and what it means in terms of getting a high ROI on your crypto hedge fund.

Risks and Rewards: The Correlation

In financial investments, risk and reward always go hand in hand. If you want high rewards, you have to accept higher risks. Cryptocurrencies offer the perfect illustration.

The crucial takeaway is that when you choose a crypto hedge fund, you invest your money in a high-risk asset.

Yet that investment carries the potential for greater rewards than you might see with other funds, such as stocks. Having a high-risk tolerance is essential. It’s rare to find a crypto investor who is risk-averse.

Balancing Risks and Rewards

The goal of hedge funds is to provide healthy returns while managing risks. Doing so requires a balance.

Too much hedging or diversification could hurt the ROI of the fund. So fund managers must make careful decisions about reducing volatility while still hitting a high ROI target.

The way they do this is through analysis of the fund. They’ll use tools to track what’s happening on the market and use their experience to take action.

Getting real-time insights into the fund performance is the best way to ensure you see a profit from your investment.

The Sharpe Ratio

Analysis work in fund management includes checking a metric called the Sharpe Ratio.

It measures how the fund performs compared to the risk-free alternative. It will show you the long-term return for each risk score, and you should see a correlation.

The higher the return, the higher the risk. The Sharpe ratio can help you determine the risk profile of each fund and help you compare like for like.

It will show you funds offering excellent management and performance instead of those performing well because the market is riding high.


If a market is liquid, it’s easy for buyers and sellers to make trades. Doing so won’t have a dramatic impact on the overall price of the asset.

Illiquid markets are the opposite. These can suffer sudden price changes if a significant trade happens. It’s common in the crypto world, particularly in the newer currencies.

For crypto hedge funds, they will need to manage the investments to ensure enough liquidity in the market.

Without that, avoiding a possible threat like a downturn could be harder. It also means they can return investors’ money more easily during a sale, meaning your funds aren’t at risk.


A redemption, in financial terms, is where an investor withdraws their money from a fund. It’s a standard and well-worn process in traditional hedge funds. Yet, crypto is slightly different.

Being able to withdraw your money is vital to achieving that high ROI you want, so you must understand a fund’s redemption policies. That means reading the small print.

If the crypto fund is relatively illiquid and withdrawal restrictions are in place, that could impact you. Always do your homework before choosing your fund.

Maximizing Your Returns With the Best Crypto Hedge Fund

The crypto landscape can seem like a lot to navigate.

While the potential for returns can seem enticing, knowing your risks is essential. The more you understand volatility and crypto markets, the easier you’ll find it to make a sound investment decision.

A crypto hedge fund with an excellent track record could offer you the balance you need from a volatile market when you want a high ROI.

Are you ready to take the next step on your crypto journey and choose a hedge fund? You’re in the right place.

Explore the fund available from True Code Capital. Learn about our reputation and expertise and how we can help you invest your money wisely.

Learn More: Take the crypto quiz

Take a three-minute quiz to learn how to become a more confident crypto investor.

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