Can professional asset managers really provide market-beating returns? An honest look at traditional and crypto management funds.
Today there are more than 130,000 mutual funds globally, but not many people know that the first wealth management service dates back to 1774 in the Netherlands. While very primitive in its early structure, the Dutch fund opened a completely new market for people to diversify their wealth by pooling capital together in order to own an asset.
Soon after the first, many more mutual funds opened across Europe, until eventually reaching America and evolving to what we know nowadays as official open-ended mutual funds (no limit in offered shares).
In this article, we will analyze the state of the wealth management market in 2022 plus what types of investment vehicles there are.
Wealth management is the professional practice of investing and growing assets while also minimizing risk and preserving wealth.
There was a rapid development in different mutual funds in the past century, such as Index Funds, Hedge Funds & ETFs. Following the expansion of mutual funds had been the creation of various retirement and tax vehicles such as the IRA and 401(K) accounts (some of which operate as closed-end funds and offer a fixed number of shares).
Now in the modern age, with the boom of Blockchain technology and the growth of the Web3 industry, the wealth management sector strives for new solutions that can handle the dynamic environment of these novel markets and the cash flow they generate.
Let’s dive into some statistics now.
Despite being shaken during the 2008 financial crisis — according to the Federal Reserve, households lost 20% of their wealth across the U.S. between 2007 and 2009 — the wealth management industry has since re-emerged, seemingly unscathed. The wealth management industry worldwide is estimated to hold $103 trillion in assets under management (AUM), making it an enormously large sector. For comparison, the value of the US gross domestic product (GDP) is $20.94 trillion (2020), around ⅕ of the assets being under management.
More than half of managed assets belong to institutional investors like banks and funds. The rest belongs to smaller organizations or individuals. Retail portfolios, representing 41% of global assets at $42 trillion, grew by 11% in 2020, while institutional investments grew at a similar pace to reach $61 trillion, or 59% of the global market. Retail investors were the main driver of net inflow, contributing 4.4% of net new capital in 2020, twice the size of the contribution made by institutional investors (2.2%).
Assets under management (AUM) of crypto funds continued to grow worldwide since the beginning of 2018. Crypto funds’ cumulative AUM surpassed $20 billion for the first time in 2020 and reached a peak of $59.6 billion at the end of the third quarter of 2021.
Data shows that institutional investors now own almost 8% of the total supply of Bitcoin. The top holders now have hundreds of thousands of bitcoins in their care.
The performance of wealth management providers ranges from the type of solution and the investment horizon.
For example, the historic annualized average return of the Standard & Poor’s (S&P) index is around 10.5% since its inception in 1957.
For stock mutual funds, a “good” long-term return (annualized, for 10 years or more) is 8% to 10%. For bond mutual funds, a good long-term return would be 4% to 5%. For the last 10 years, the mean annual returns of the mutual fund were 8.51%. In 2021, 816 funds returned 91.73% to -8.37% with mean annual performance being 11.54%.
Despite the reputation of hedge funds to have an ability to generate alpha, their profitability dropped significantly in the last decade. An equally weighted hedge fund index returned a cumulative 225% from 1997 to 2007 but just 25% over the 2008–2016 period. A recent study on the basis of the Warren Buffet experiment conducted that the average annual gain of five funds of funds (FOF) ranged from 0.3% to 6.5% from 2011 to 2020.
As of the recent data, hedge fund managers produced an aggregate performance of 10.3% in 2021, underperforming the S&P index which showed gains of 26.61% that year.
There are also outliers in the hedge fund industry that deliver remarkable returns over a long time period. Perhaps the most enigmatic and impressive hedge fund on Wall Street is Renaissance Technologies’ Medallion fund, which from 1988 to 2018 clocked annualized returns of 66%. After fees, those annualized returns were still remarkable, at 39%. Citadel’s long-term track record is remarkable, with a 31-year annualized return of 19%.
Since the cryptocurrency markets are relatively new, the track record data of funds operating in this industry is scattered or undisclosed.
Pantera Capital, one of the first players in the crypto asset management market, has shown a compound annual growth rate (CAGR) of 99.9% from Q3 2013 to 2021. For reference, Bitcoin’s CAGR for the same time period is 98.44%.
The median crypto hedge fund returned +128% in 2020 (vs. +30% in 2019). However, neither of them was able to outperform BTC itself, which went up 305% in 2020. A similar conclusion can be drawn from 2019 data when BTC rallied 95% in that year.
Most of the asset managers who entered the market in recent years weren’t able to catch the 300%+ annual gains in Bitcoin and, therefore, make significant returns for investors. However, the most powerful weapon in the arsenal of successful emerging fund managers is the excess returns of the underlying assets.
For example, since One Button Capital launched its trading strategies in November 2020, they have delivered an average monthly excess return of 4.22% on top of Bitcoin to date. However, it doesn’t mean the strategies were making a profit — it only means that they were doing better than Bitcoin by 4.22% per month. Some of the most successful strategies were outperforming the underlying asset by as much as 4.70% per month.
The absolute gains from the strategies, however, don’t look that impressive (yet). The last 6-month aggregated performance shows that OB Capital strategies are down by 12.23%, while Bitcoin and Ethereum are down by 48.56% and 50.91%, respectively.
Yet, data from some of the strategies that were actively trading before the Q4 2021-Q2 2022 bear market shows its capacity to generate profits. For instance, the BTC: USDT trading bot created on February 12, 2021, using the Astral strategy returned a +87.10% net profit over 15 months of trading when the underlying asset was down by -38.8% for the same period. Remarkable numbers in both relative and absolute terms.
The final judgment becomes evident: the earlier you entered the crypto market as an asset manager, the better annual returns and growth rates you can demonstrate due to the remarkable gains shown by the crypto market itself since its inception. But that doesn’t mean that the performance of these funds is better than Bitcoin, which is used as a benchmark. Only a few asset managers can demonstrate such results in the long run.
The wealth management industry has been growing massively throughout the last decades, with a few remarkable players leading the market with consistent returns. The estimated capital under management globally is $103 trillion.
There is an emerging trend in the growing market of retail investors. With the growth of technology, more and more households are getting access to high-tech investment tools every year. This gives retail fintech investment product creators a lot of opportunities to tap into the growing market share.
The cryptocurrency market is growing as well, with players from traditional finance moving their capital into the decentralized domain. More and more retail investors are becoming educated about the crypto markets and showing an interest in investing in the space.
Asset managers who are the first to act on growth opportunities and take advantage of them are likely to gain a strong advantage that will last for a long time.
We regularly prepare insightful reports and case studies about crypto trading and the blockchain industry.
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