Hedge funds increase exposure to U.S. spot bitcoin exchange-traded funds in the third quarter

Hedge funds including Millennium Management, Capula Management and Tudor Investment increased their exposure to U.S. spot bitcoin exchange-traded funds

Major hedge funds boosted their holdings in U.S. spot bitcoin exchange-traded funds (ETFs) in the third quarter, securities filings showed on Wednesday, as a hot election-driven arbitrage trade ramped up.

President-elect Donald Trump embraced digital assets during his campaign, promising friendly regulation and to accumulate a national stockpile of bitcoin. The cryptocurrency surpassed the $90,000 level to reach an all-time high earlier this week, although it has pared gains.

During the election price volatility, some hedge funds have been taking advantage of a price difference between spot bitcoin and its derivatives in the futures market in a leveraged trade, according to analysts. Spot ETFs were approved by the Securities and Exchange Commission earlier this year.

The seal of the Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington. (REUTERS/Jonathan Ernst/File Photo / Reuters Photos)

In the so-called bitcoin basis trade, investors buy spot bitcoin - or its ETFs - and short the cryptocurrency futures, which have been trading at substantially higher prices this year. This gap widened after the election result and on Nov. 11 reached 17% in an annual basis, CF Bitcoin data showed, but pared gains to 12% on Friday.

"Hedge funds are harvesting that spread. It creates a very tactical, opportunistic trade," said Gabe Selby, head of research at Kraken's CF Benchmarks. "It has an uncorrelated return."

Positions unveiled in 13-F filings this week only show long equity bets placed by hedge funds and not wagers on the fall of share prices or derivatives. Reuters could not determine whether specific hedge funds were putting on such an arbitrage bet, only if they have taken long positions.

Among those that increased their exposure to the cryptocurrency was Israel Englander's Millennium, which more than doubled its number of shares in iShares Bitcoin Trust to 23.5 million shares, valued at $849 million, from the previous quarter. It also increased its positions in ARK 21Shares Bitcoin and Bitwise Bitcoin funds.

Overall, the New York-based hedge fund ended September with $1.7 billion in crypto ETFs, including spot bitcoin and ethereum funds. The ETFs account for a small portion of the firm's $70 billion in assets under management.