© Reuters. FILE PHOTO: U.S. Securities and Exchange Commission brand and representations of cryptocurrency are seen on this illustration taken June 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Carolina Mandl and Nell Mackenzie
NEW YORK/LONDON (Reuters) – A handful of hedge funds made a profitable guess on approval of a spot bitcoin exchange-traded fund (ETF) by investing within the Grayscale Trust (GBTC) properly forward of regulatory log off, in response to sources accustomed to the matter.
Hedge funds purchased shares within the Grayscale Bitcoin Trust (GBTC) between 2021 and 2023 betting its worth would skyrocket as soon as the Securities and Exchange Commission (SEC) gave the spot bitcoin ETF its inexperienced mild, the sources stated.
Grayscale had been unsuccessfully attempting to transform its belief into an ETF since 2016 and filed a lawsuit towards the SEC in 2022 after the regulator rejected its new software.
Grayscale Bitcoin Trust was transformed from a belief to an ETF on Jan. 11 after the SEC authorized U.S.-listed ETFs monitoring bitcoin.
Awaiting regulator approval, Grayscale’s belief was buying and selling at a reduction to its underlying property that reached nearly 50% in December 2022, in response to knowledge platform YCharts, following the collapse of crypto alternate FTX.
For some hedge funds, the potential positive factors that the ETF approval may generate changed into a commerce. As quickly as a court docket determined in favor of Grayscale in August 2023, the value hole started to shut, the information present.
A market maker stated roughly 20 hedge funds, from small to large companies, did this commerce. This supply spoke on situation of anonymity as a result of this particular person is just not allowed to debate purchasers’ positions publicly.
Grayscale and the SEC didn’t reply to a Reuters request for feedback on the matter.
Hedge fund Fir Tree Partners, with $3 billion in property underneath administration, first noticed a possibility within the final quarter of 2022, when Grayscale’s belief was buying and selling at a 42% low cost to its property, an individual accustomed to the matter stated. Its guess on the value dislocation narrowing totaled $60 million.
The agency, which declined to remark, began to exit the place in September final 12 months, after the court docket determination. Fir Tree totally bought it in January, following the regulatory approval of the product, in response to the supply.
Hedge fund Hunting Hill additionally invested in GBTC when it was buying and selling at a 42% low cost and closed it when it narrowed to 7% final 12 months, a supply accustomed to the matter stated.
The founding father of a U.S.-based macro hedge fund instructed Reuters his conviction on the approval elevated after a court docket ruling stated in August final 12 months the SEC was flawed to reject Grayscale’s software. He described it as “the trade of a century.”
Not all the cash within the GBTC guess, nonetheless, is returning to the bitcoin house. Many hedge funds are among the many buyers driving outflows in GBTC after its conversion into ETF. Outflows whole $4.77 billion since its launch earlier this month, bringing the ETF’s property to $20.4 billion.
For many portfolio managers, the value arbitrage was opportunistic.
“It worked out to be a very good trade,” stated Christopher Brown, founding father of the multi-strategy hedge fund Aristides Capital, primarily based in Louisville, Kentucky. The $240 million agency invested roughly $20 million in GBTC with a median low cost of 30% to its property.
The fund has bought most of its positions and plans to totally exit within the coming months, as Brown is just not enthusiastic about investing within the spot bitcoin ETF. “We’re not inherently super excited about bitcoin.”