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  • Grayscale Investments, which runs 10 crypto-linked investment trusts, had more than a quarter of a billion dollars' worth of inflows in the third quarter, with an overwhelming majority coming from hedge funds. 
  • Crypto and crypto-linked products were hit hard over the same period, with bitcoin's price falling by 25% in the quarter.
  • Grayscale launched a marketing campaign in May to urge investors to swap gold for crypto in their portfolios.
  • Click here for more BI Prime stories

Bitcoin got crushed. Hedge funds didn't care.

That's the story of the third quarter, according to Grayscale Investments. The $2.2 billion asset manager runs 10 crypto-linked products.

According to the firm's recently released flow numbers, last quarter was the most money the firm has seen flowing into its products ever — with $254.9 million in total.

And the overwhelming majority of those assets — 84% — came from hedge funds. That's a marked increase from the first quarter of this year, when hedge funds represented just 56% of the flows. 

"There is an across-the-board sentiment that digital currencies is an asset class that is not going away," Michael Sonnenshein, the managing director of Grayscale, said.

Read more: Jonathan Soros is pumping $300 million into a new hedge fund run by one of his father's former portfolio managers

What's notable is that hedge funds were pumping in money while the most popular currency, bitcoin, was hit hard. Bitcoin fell by 25% in the three months ending September 30 but has still outperformed nearly every asset class this year, with the price more than doubling since the beginning of 2019 despite the third-quarter woes.

Grayscale products likewise slumped in the quarter, with each one losing at least 30% of its value, but Sonnenshein believes hedge funds have noticed the bigger picture. For instance, the firm's biggest offering — a bitcoin-linked trust — has notched returns of more than 5,500% since it was launched in 2013. 

"They're looking for alternatives for new sources of alpha," he said, attributing the volume of flows partially to the firm's marketing campaign, which it launched in May, that implored investors to drop gold in favor of crypto in their portfolios.

Hedge funds, despite posting their best start to the year since 2013, with an average return of 4.9%, have still struggled to outperform the general market, pushing investors to demand greater transparency and more lenient fee structures. Crypto, Sonnenshein said, has been seen as a way for them to boost returns.

"They're having a hard time finding an investment opportunity with a better risk-return profile right now than bitcoin," he said.

Read more: The clock is about to strike midnight on a hedge fund's $1 million bet on bitcoin soaring above $50,000

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