Capital consultancy Greyspark have released a report charting the changing landscape of cryptocurrency investment. As the marketplace matures, two tidal shifts are taking place: ICOs are losing popularity with retail investors, and avenues for institutional investors to enter the space are increasing.

Disappointing progress, poor marketing and the proliferation of scam projects are cited in the report as the key reasons for the falling success rate of ICOs, and their returns have been significantly reduced in 2018. Crypto hedge funds on the other hand have seen continued growth despite a slight downturn in parallel with the bear market.

Half of all ICOs fail to hit funding target

According to Greyspark, half of the ICOs from 2017 and 2018 failed to hit their funding target, and as many as 890 token sales raised no funds at all. But in the same period, more than 40% of ICOs (743 firms) raised more than $1 million.

This data suggests that since the mania of 2017 has subsided, investors have become increasingly astute, and the quality of projects has risen in tandem. Greyspark’s report found that in Q2 2018, 15% of ICO projects already had a working product, compared to only six percent of projects in Q1.

Despite the lagging performance of ICOs, the report finds general cryptocurrency development continues unabated—at least when measured by growth in Google search queries (still up from last Autumn despite the bubble) and by number of exchange sign ups, which show a similar upward trajectory.

But as the market matures, this growth is taking a new form. Retail investors swayed by the marketing of ICOs are being replaced by institutions, whose trading is largely conducted through OTC crypto trading desks and a small number of crypto hedge funds. These avenues are relied on by institutional players to help them overcome the challenges they face when entering the market—including access to sufficient liquidity, privacy, security, and reduced counterparty risk.

“Financial institutions have started to engage, although carefully, with their first cryptocurrency-related projects and the whole industry is evolving rapidly with the clear objective to attract the big money” said hedge fund manager and report co-author Eitan Galam, in a statement.

As of September, the number of crypto hedge funds has increased significantly, and after bouncing back from a drop in January, the total number of funds is now approaching 150, up from only nine in 2012.

What is a crypto hedge fund?

In the traditional financial world, hedge funds use their expertise to invest the money of institutions and wealthy individuals—luring them in with the possibility of earning returns much greater than those offered by standard market index trackers by managing market ups and downs by taking long and short positions.

In a similar way, crypto hedge funds provide active portfolio management for cryptocurrency assets, using a range of different investment strategies to try and generate larger returns than would be granted by following the market movements of any one cryptocurrency.

This approach has proved appealing to institutional investors, who usually don’t have the inclination to keep up with such a fast-moving market, or the means to store large amounts of cryptocurrency safely.

Crypto hedge funds hold up to $5 billion

According to the report, while institutional trading in crypto is still relatively low compared to other asset classes, the number of crypto hedge funds has increased significantly over the past two years, and is expected  to reach between 160 and 180 by the end of 2018.

These funds—which are usually run by fewer than five people—are made up from a mix of both defectors from the traditional world of finance seeking escape from the excruciatingly low yields of bonds and equities, and famous figures from within the crypto community.

Collectively, these funds manage up to $5 billion in crypto assets, mostly on behalf of institutional investors, wealthy individuals, and Venture Capital firms like Sequoia Capital and Andreessen Horowitz, who have both backed Naval Ravikant’s crypto hedge fund MetaStable.

Active versus passive debate enters crypto

In recent years managed money has underperformed passive strategies with the proliferation of ETFs which have eaten into hedge fund profits and market share. Traditionally hedge funds have charged notoriously high fees dubbed the “Two and Twenty” ratio which is a flat 2% management fee on top of a 20% slice of the profits if they reach a certain threshold.

So if a fund has $1 billion in assets under management (AUM) it is guaranteed an annual $20 million regardless if it generates a profit or loss and with their underperformance in this extended stock market bull run even wealthy individuals have switched to passive funds.

In contrast, the SPY ETF, one of the world’s most liquid exchange-traded funds that tracks the S&P 500, has a management fee of 0.09%. Hedge fund managers have responded by cutting their fees to as low as 1:10 split.

What this investment means for crypto is not easy to predict, but by acting as supersized individual investors—or ‘whales’ in crypto parlance—these funds add liquidity to the market, potentially creating greater price stability, and in the long run more confidence for increasingly mainstream institutional investors to enter the space.