Morgan Creek Founder Sees Crypto Hedge Funds Shutting Down Soon

Nov 20, 2018 at 22:01

Morgan Creek Digital Founder Anthony Pompliano said the bearish crypto market puts crypto hedge funds in danger of closing down.

“Many organizations in crypto are in more trouble than people realize… crypto hedge funds are going to start shutting down due to high water mark issues,” Pompliano said in his blog post published Nov. 19.

He defined high water mark as ”a contractual clause in fund documents that ensures fund managers only receive their performance fee if the fund’s net asset value is higher today than in any previous investment period.”

Pompliano noted that last year marked the end, and at the same time the peak, of the investing period for most funds. Since then, funds have plunged by as much as 50 to 80 percent in net asset values. 

This, as well as the struggle to double or quadruple net asset values from the current level, will leave some fund managers without a performance fee for this year.

“It wouldn’t surprise me if fund managers won’t be able to achieve those levels of profits until at least 2020, if not further out. This lack of eligibility for their most important financial incentive will lead to many fund managers shutting down their funds and returning capital to investors. They are likely to sit out of the game for a few months or even a year, before returning with a new fund that will not be subjected to the high water mark challenges,” Pompliano said.

As to why most fund managers haven’t shut down despite this looming possibility, several managers are “young/inexperienced and they won’t realize the issue until they don’t receive their performance fee for 2018,” the crypto figure said.

“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. Time will tell how many decide to close up shop versus ride out the prolonged bear market,” Pompliano added. 

But aside from the current market performance, another factor compelling a shutdown is the new SEC policies seen to make business difficult for ICOs. 

These are the inclusion of most ICOs as unregistered securities and the imposition of fines for  projects that fail to comply with its rules.

“The current bear market is going to go from bad to worse very quickly for both crypto funds and ICO projects. The pain ahead is something that many of these entrepreneurs and fund managers have never had to deal with…,” Pompliano said.

“If ICO projects begin filing for bankruptcy, crypto funds will have to start writing investments to zero at an accelerated rate. The compounding effect of the high water mark issues and deepening losses should be quite discouraging for fund managers and limited partners alike. 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,” he added.

The market tally by shows that Bitcoin dropped 16.15% in the day to $4,569.10 per piece, as of writing.