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With the rise in crypto adoption, an increasing number of investors and fund managers have been allocating a small portion of their portfolios for cryptocurrencies. A new study now suggests that diversifying with the inclusion of crypto assets has been shown to positively impact the performance of these portfolios.
Research commissioned by Iconic Funds and the Cryptology Asset Group studied the impact of crypto investments on the performance of a portfolio. The study, titled “Cryptocurrencies and the Sharpe Ratio of Traditional Investment Models” noted that despite its volatility, exposure in crypto assets has improved the profitability of diversified investment portfolios.
“Our report concluded that a small, rebalancing allocation to cryptocurrencies has a significant impact on the Sharpe ratio of all the portfolios investigated,” the researchers wrote. The performance of these diversified portfolios is particularly noteworthy considering the challenging economic climate due to the coronavirus pandemic.
“The past year was special for most investors because most portfolios took a considerable hit, due to the spread of the corona pandemic, lockdowns, and the resulting economic downturn,” the study said. “This report analyses whether cryptocurrencies could have helped investors weather the crisis a bit better.”
The study’s risk-return examination was conducted by measuring changes in the Sharpe ratio. The Sharpe ratio is a financial metric often used by investors to assess returns for holding assets considered volatile, such as cryptocurrencies.
The research examined the impact of adding cryptos into different investment portfolio models. These include traditional stock/ bond portfolios (with weights of 50/50 and 80/20), balanced portfolios (stocks/ bonds/ real estate/ gold/ commodities), endowment model portfolios, family office/ high net worth individuals’ portfolios and pension fund portfolios.
For traditional stock/bond portfolios (50/50), allocating just 1 percent to crypto-assets resulted in an increase of the Sharpe ratio to 7.6619 compared to the reference index of 6.7929. Increasing the crypto allocation to 3 percent likewise resulted in an increase of the ratio to 8.9972 while a 5 percent allocation produced a ratio of 9.8459.
For the traditional stock/ bond portfolio mix of 80/20, allocating 1 percent to crypto increased the Sharpe ratio to 6.9339 from the reference index of 6.3342. A 3 percent crypto allocation increased to ratio to 7.9761 while increasing the crypto allocation to 5 percent increased the ratio to 8.7968. This pattern is likewise detected in balanced portfolios, endowment models, pension fund models, and family office models.
“This report finds that the addition of cryptocurrencies to any portfolio covered had a positive impact on the returns as well as the risk-reward performance of the portfolio,” the researchers concluded. “This finding holds despite a significant correction in the crypto markets during the beginning of 2021. Furthermore, the addition of more cryptocurrencies led to even higher returns.”
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