ZX Squared Capital says its Bitcoin-focused hedge fund has returned 229.18% since inception while keeping volatility and peak-to-trough losses materially below those of holding Bitcoin outright, offering a risk-managed approach aimed at family offices and other allocators constrained by large cryptocurrency drawdowns.
The fund, co-founded by former Credit Suisse executive CK Zheng, reported an average annualized return of roughly 30%, compared with Bitcoin’s cumulative 136.94% gain over the same measurement period. ZX Squared attributes the difference to a strategy that holds Bitcoin in the spot market for the long term while buying options protection against severe downside moves, without using leverage.
That combination places the fund in a narrower segment of the crypto market: managers seeking to preserve Bitcoin exposure while making its risk profile more tolerable for portfolios that cannot absorb the asset’s historical 70% to 80% declines. The strategy does not seek to outperform Bitcoin in every rally. Its stated aim is to surrender part of the upside when necessary in exchange for less violent losses during market stress.
Options hedges target lower drawdowns
Bitcoin’s realized volatility has typically ranged from 55% to 70%, according to the fund’s description of the market. ZX Squared said its hedging framework brought portfolio volatility to about 37%, using options contracts that gain value or reduce losses when Bitcoin falls sharply.
Options give a holder the right, but not the obligation, to buy or sell an asset at a predetermined price. In this case, put options can act as insurance: the fund pays a premium for protection that can offset a portion of losses if Bitcoin drops below certain levels.
The approach was tested during the 2022 crypto bear market, when Bitcoin suffered a maximum drawdown of about 65%. ZX Squared reported a drawdown of about 35% over the same period. The difference is central to the fund’s pitch to institutions, where risk limits and capital-preservation requirements can make unhedged Bitcoin allocations difficult to approve.
A 35% decline remains substantial, particularly for a portfolio marketed as risk-controlled. Yet reducing the loss from roughly two-thirds to around one-third would change how an allocator assesses recovery time, liquidity needs and the amount of capital it can dedicate to Bitcoin.
ZX Squared’s operating rules are straightforward: maintain a long-term spot Bitcoin holding, hedge downside with options, use conservative custody arrangements and avoid leverage. The fund also says it excludes meme coins and keeps core exposure concentrated in Bitcoin and other large digital assets.
Zheng’s risk background shapes the strategy
Zheng spent 17 years at Credit Suisse, where he served as global head of valuation risk. His earlier career included roles connected to valuation-risk management and derivatives trading, giving him experience in the types of models and hedging tools that have long been common in traditional markets.
He left traditional finance in 2021 and launched ZX Squared after Bitcoin options markets had become more developed. The growth of listed and over-the-counter Bitcoin derivatives has made it easier for professional managers to construct hedges, although the cost of that protection can rise sharply when traders are already worried about a sell-off.
That timing matters to the fund’s model. Buying downside protection after volatility has already surged can be expensive, potentially dragging on returns. A manager using options must therefore balance the desire for a strong hedge against the recurring cost of maintaining it. ZX Squared’s reported returns suggest the fund believes this trade-off has been worthwhile through its measurement period, though performance will depend heavily on future option pricing and the size and timing of Bitcoin’s swings.
Zheng’s market calls during 2022 also form part of the fund’s record. In July that year, when Bitcoin traded near $20,000, he publicly warned that deleveraging could push the asset toward $15,000. Bitcoin eventually bottomed near $15,500 in November 2022, according to widely tracked market data.
Following the FTX collapse, Zheng said on Nov. 17, 2022, that the failure would mark the final major bearish shock of that bear market. Bitcoin recovered from its November cycle low in the following period. Those calls do not establish a repeatable forecasting record, but they show that the fund’s risk stance has been shaped by an expectation that forced deleveraging can create unusually deep, temporary dislocations.
Institutional ownership could alter cycle patterns
Zheng has estimated that institutions account for roughly 10% of Bitcoin participation and has argued that a 30% to 50% share could begin to alter the market’s familiar four-year cycle dynamics. His view rests on the prospect that long-term allocations, regulated investment products and professional risk management could reduce the influence of highly leveraged retail speculation.
The argument remains unproven. Bitcoin has repeatedly developed new market structures without fully escaping sharp cyclical declines. Exchange-traded products, corporate treasury purchases and derivatives markets have expanded access, but they have also created additional channels for rapid positioning changes.
For family offices, Zheng has outlined a model allocation of 5% to Bitcoin alongside downside hedges. Such a structure would cap the initial portfolio weight while allowing the position to participate in large upside moves. The hedge is designed to address the governance challenge created by Bitcoin’s historic drawdowns rather than eliminate risk altogether.
Stablecoins and tokenized assets broaden the adoption case
Zheng has also pointed to stablecoins and tokenized real-world assets as areas that could connect digital-asset markets more closely with payments and traditional financial products. He has referenced U.S. legislative efforts including the Genius Act and the Clarity Act in discussing the regulatory framework that could shape those markets.
For ZX Squared, the practical question remains less about predicting every short-term Bitcoin move than about building an allocation structure that can survive one. A spot position paired with options and zero leverage gives the fund fewer ways to amplify gains during a rapid rally, but it also removes the risk of forced liquidation that has repeatedly intensified crypto downturns.
Want more on risk-managed Bitcoin strategies? Explore our guide on crypto derivatives and apply hedging insights to your portfolio.
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