🤑 Bitcoin’s Market Cap Jumps Over $1 Trillion

🐺 Hi pack-mates,

This is Howling Markets, the newsletter of newsletters that channels all the interesting daily news!

Today we will be covering:

• Education: What Is a Funds of Funds? 💸

• Hedge Fund Fees Skyrocket to The Highest Level Since 2016 🎢

• Bitcoin’s Market Cap Jumps Over $1 Trillion 🤑

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

What is a Fund of Funds?

Over the past newsletters we have been discussing how unique Hedge Funds are. They are essentially an unregulated group of rich people directed by a fund manager that tries to generate returns from the market using sophisticated trading strategies.

Despite the fact that this definition might be slightly overexaggerated, it contains all the key points of these investment vehicles, and because of these characteristics, they are extremely difficult to get into.

Additionally, because each fund usually specializes in a particular trading strategy or group of assets, each potential investor will have to do a substantial amount of research before pulling trigger and committing to a specific fund.

As a matter of fact, given the extremely high minimum investment requirements, on average $1,000,000, a wealthy investor will usually not have enough capital to build a diversified hedge fund portfolio, increasing their risk.

To solve this issue, a specific type of hedge funds was created: the Funds of Funds. Their investment strategy consists in sharing their AUM in various Hedge Funds which only specialize in a specific strategy. By doing so, they are usually able to minimize risks and to generate higher returns.

In addition, the investors would have access to a diversified portfolio hand-picked by a fund manager, so they would skip the research, and in theory, obtain a better result. Were you aware of this particular hedge fund strategy?

Hedge Fund Fees Skyrocket to The Highest Level Since 2016

During riskier financial periods, the most volatile assets are the first to be sold by the majority of investors. Considering the structure and nature of Hedge Funds, it is no surprise that the demand for this investment vehicle has significantly dropped over the past decade.

However, since the beginning of the bull run at the end of October 2023, many investors started seeking new ways to capitalize on the extraordinary market performance, rediscovering hedge funds.

A survey made by the French bank BNP Paribas showed that the hedge funds’ average annual performance fees surged to 17.82%, the highest level since 2016 and quite a bit higher with respect to the 16.91% registered in 2023.

Among the funds with the highest fees are most funds of funds because their investors are indirectly paying double the fees with respect to single hedge funds fund.

This is because when investing in a fund of fund you will have to pay the annual percentage fee on profits plus the management fee, just like with traditional funds. However, the fund of fund will have to pay such fees also on the hedge funds they hold in their portfolio. So, the ultimate investors only receive the returns after being discounted twice.

Additionally, there is also another group of hedge funds that has distinguished themselves for having relatively high fees: funds adopting a pass-through model.

This model consists of not charging a management fee to the fund’s investors, but rather charging them all the expenses, including salaries, R&D and so on. Despite at the beginning a “no management fee” can seem appealing, this model usually charges an expense fee between 3% and 10%, significantly higher than the average 1.5%-2% management fee.

On top of this, many analysts also argue that a pass-through model is detrimental to the fund’s performance because the managers will have no incentive to minimize their costs, eroding even more the investors’ margin.

Today’s Howling Question

And now, it is time for our howling question!

One of the most successful Fund of Funds ever is the Millenium Fund, which was established in 1989 with just $35 million. Nowadays it manages more than $60 billion.

Which has been the average annual return of this fund, net of all fees, between 1989 and 2019?

a) +5%

b)  +8%

c)  +14%

d) +22%

e)  +31%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Bitcoin’s Market Cap Jumps Over $1 Trillion

The period between the end of 2021 and the beginning of 2023 has been particularly though for Bitcoin, as its price dropped back to around $15,000 and many other crypto projects were being launched promising many interesting alternatives.

However, Bitcoin never lost its role of market leader and, after an exceptional 2023, it has finally managed to breach the $50,000 mark and, together with this achievement, it surpassed a market capitalization of $1 trillion.

To put things in perspective, let’s make a comparison with Ford. This all American-made company founded more than 120 years ago, generates billions in net profits and pays dividends, but it only has a market cap of $50 billion, one-twentieth of Bitcoin.

On the other hand, it is important to mention that it is not the first time that Bitcoin has achieved this goal. The trillion-dollar market cap was first breached at the beginning of 2021 and then once again right before the end of the same year. However, in 2022 Bitcoin’s market cap dropped as low as $300,000, so getting back above $1 trillion in this little time is a significant feat of strength.

The power of Bitcoin is also demonstrated in the chart below which represents the cryptocurrency market composition. Despite the increase in number and in popularity of new cryptocurrencies, Bitcoin (dark blue area) has managed to maintain its 2017-2018 market share of just over 54%.

Equity and Debt Markets Update

And now, our daily markets update!

On Wednesday, the stock market opened slightly higher with respect to yesterday’s closing price, but then it continued to move down throughout the session. However, just an hour before the end of the trading day, the market rallied and closed an exceptional +0.96% higher.

Likewise, the bond market also used today’s session to retrace part of yesterday’s catastrophic performance. After an almost +4% increase on Tuesday, the benchmark 10 year US government bond yield dropped by -1.37% on Wednesday.

Answer

The correct answer is c) +14%

Considering that hedge funds charge extremely high fees, an average annual return of +14% over a 30 year period is nothing short of exceptional.

Howl-Worthy Memes 😂

🐺 See you next time!

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