Skip to content Skip to Search
Skip navigation

Arbitrageurs: the funds making tons from messy markets

Arbitrageurs, players such as hedge funds who thrive on exploiting price differences between different geographies and exchanges, are faring better than other crypto investors

‘Arb trading’ is not for everyone but can be profitable

The crypto market’s a hot mess, leaving many investors struggling to turn a buck. Enter the arbitrageurs.

Bitcoin and other cryptocurrencies have either been shackled to ranges or in decline since January, leaving your regular buy-and-hold investor with little option but to sell or to wait for the elusive rally.

One class of seasoned investors is faring better, though: the arbitrageurs, players such as hedge funds who thrive on exploiting price differences between different geographies and exchanges.

“In May when the market collapsed, we made money. We are up 40 basis points for the month,” said Anatoly Crachilov, co-founder and CEO of Nickel Digital Asset Management in London, referring to their arbitrage strategy.

“Arb trading” involves buying an asset in a cheaper venue and simultaneously selling it elsewhere where it’s quoted at a premium, in theory pocketing the difference while being neutral on the asset.

It’s certainly not for everyone, and requires the kind of access to multiple markets and exchanges, and often the algorithms, that only serious players like sophisticated hedge funds can secure to make it a profitable endeavour.

Yet for investors who meet the bar, it’s proving attractive.

Such “market neutral” funds have become the most common strategy among crypto hedge funds, making up nearly a third of all currently active crypto funds, according to PwC’s annual global crypto hedge fund report published last week.

K2 Trading Partners said its high-frequency trading crypto arbitrage fund, which is algorithmically driven, had returned about 1 percent this year through to the end of May, even as bitcoin slumped 31 percent in the same period.

Meanwhile Stack Funds’ long/short trading fund with exposure in liquid cryptocurrencies saw its single biggest monthly loss of about 30 percent in May, while its arbitrage-focused fund shed 0.2 percent.

Your finds frozen

While arbitrage has long been a popular strategy in many markets, the young crypto sector lends itself to the approach as it boasts several hundred exchanges across a world with inconsistent regulation, according to participants.

Hugo Xavier, CEO of K2 Trading Partners, said arb trading benefited from a lack of interconnectivity among crypto exchanges: “That’s good because you have different prices and that creates arbitrage opportunities.”

For instance, bitcoin was trading at $27,493 on Coinbase on Monday, versus $28,067 on Bisq. Bitcoin is down 44 percent this year, and at December 2020 lows.

Yet market watchers also point to the possible pitfalls, including technical snafus on exchanges slowing or freezing-up transactions, potentially robbing arb traders of their edge. Some lightly regulated venues in smaller countries, which offer many good arb opportunities, pose extra risks.

“It’s normal for an exchange to go offline,” Xavier added. “Your funds can be frozen for some reason.”

Stress situations

Price discrepancies have typically arisen because of the less experienced retail traders who make up the bulk of crypto trades, particularly in the derivatives market. And, while arbitrage strategies are direction-neutral, they tend to perform better when bullish markets attract more retail participation.

“Of course, you want to have retail traders on the same exchange that you are when you’re doing arbitration because you will have less smart money. When there’s a bullish market, retail volume comes back,” Xavier said.

“If the markets are moving sideways or going down, retail traders cool off. Opportunities are fewer because most of people there are market makers and they are efficient.”

Markus Thielen, chief investment officer at Singapore-based digital asset manager IDEG said that there had been a shift in recent months, with arbitrage opportunities mostly appearing during “market stress situations”.

“So the market structure has fundamentally changed on the arb side,” he said, adding their arb strategy generated returns of 2 percent in the last eight weeks.

Yet Katryna Hanush, director of business development at London-based crypto market maker Wintermute, said arb trading ultimately had a limited shelf life because inconsistent pricing across different exchanges was bad for investors.

“As more institutional players come into the space, the arb opportunities will be eliminated.”

Latest articles

Despite optimism from hedge funds and traders, oil prices remain relatively stable

Analysts optimistic on oil but the price stays steady

Global hedge funds and money managers have become increasingly optimistic about the short term outlook for oil prices in recent months, despite the oil price remaining flat at around $80 a barrel. The net length held by hedge funds and other money managers in WTI (West Texas Intermediate) futures and options has risen to its […]

Nadhim Zahawi, formerly chancellor of the UK, is thought to be leading a consortium of investors for a £600m bid

UAE’s RedBird IMI hopes for speedy sale of The Telegraph

Nadhim Zahawi, the former chancellor of the UK, is fronting one of seven bids to buy the Daily Telegraph newspaper and The Spectator magazine, which is owned by RedBird IMI, a US investment group backed by Abu Dhabi’s International Media Investments. The deadline for the first round of bidding was completed on Friday, although more offers […]

Egypt external debt

Egypt external debt makes record drop

Egypt’s external debt decreased by over $14 billion between December 2023 and May 2024, the steepest drop on record according to its Central Bank (CBE). External debt fell from a record high of $168 billion at the end of December to $154 billion at the end of May, a decrease of 8.4 percent. The drop […]

UAE trade minister Thani bin Ahmed Al Zeyoudi at the WTO ministerial meeting in Abu Dhabi in February. He said 'We are getting the support from many of the EU members'

UAE to revive EU trade talks before year-end

The UAE plans to restart trade talks with the European Union by the end of the year despite a broader agreement with GCC remaining on hold, according to a news report. The UAE has initiated the discussion both through the GCC and bilaterally, Reuters reported, quoting trade minister Dr Thani bin Ahmed Al Zeyoudi. “We are […]