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Hedge fund firms ranked by assets under management. Source: MutualFundDirectory.org

The world's largest 50 asset management companies, if added together, supervise a total of 78.9 trillion US dollars. Just taking 1% of the assets invested in encrypted assets will reach 789 billion US dollars, which is more than the market value of the entire Bitcoin of 723 billion US dollars.

However, hedge funds have a fundamental misunderstanding of how crypto assets work, which is what prevents allocations of 1%, let alone 5%.

Let’s break down a few of the major hurdles that the traditional finance industry has to jump over before they can truly become Bitcoin advocates.

Barrier 1: Perceived Risk

Investing in bitcoin remains a difficult decision for big hedge fund managers, especially given the perceived risks. On June 11, the SEC issued a warning to investors about the risks of bitcoin futures trading, pointing to bitcoin market volatility, lack of regulation and fraud.

For some reason, the SEC’s focus is on Bitcoin even though some stocks and commodities have similar or even higher 90-day volatility compared to Bitcoin.

DoorDash (DASH), a $49 billion U.S. public company, has a volatility of 96% compared to Bitcoin’s 90%. The $44 billion U.S. technology stock Palantir Technologies (PLTR) has a volatility of 87%.

Barrier 2: Indirect risk is almost impossible for companies in the US

Most of the hedge fund industry, those fund managers who manage billions of dollars in assets, cannot buy physical bitcoin. But these limitations can be circumvented by using exchange-traded funds (ETFs), exchange-traded notes (ETNs), and tradable investment trusts. Cointelegraph has previously explained the differences and risks of ETFs and trusts, but this is only superficial as each fund has its own regulations and limitations.

Obstacle 3: Fund supervisors and administrators may block the purchase of BTC

Although fund managers can make investment decisions, they must abide by each specific fund regulation and comply with the risk control requirements stipulated by the fund manager. For example, adding new instruments, such as CME Bitcoin futures, may require SEC approval. Renaissance Capital's Medallion Fund faced this question in April 2020.

Those who opt for CME Bitcoin futures, like those at Tudor Investments, must continually renew their positions through monthly expirations. This problem represents both liquidity risk and tracking error of the underlying instrument. Futures are not designed for long-term arbitrage, and futures prices are very different from ordinary spot transactions.

Note: Tracking error, sometimes referred to as active risk, refers to the discrepancy between the behavior of a benchmark price relative to an asset in a portfolio and the behavior of the underlying position in that asset.

Obstacle 4: There are still conflicts of interest with the traditional banking industry

Banks are stakeholder players in this space, as JP Morgan, Merrill Lynch, BNP Paribas, UBS, Goldman Sachs, and Citi are among the largest hedge fund institutions in the world.

Banks are relevant investors and distributors of these independent hedge funds, and have close relationships with asset managers. The entanglement of interests goes even further because financial conglomerates dominate the issuance of both equity and debt, meaning they ultimately determine the allocation of hedge funds in these deals.

While bitcoin has yet to pose an immediate threat to these industry giants, a lack of understanding and risk aversion, along with regulatory uncertainty, has led most of the world's $100 trillion hedge fund managers to avoid venturing into the new asset category fields.