(Bloomberg) -- The hedge fund world appears to be finding the siren song of memecoins irresistible. 

When Dogwifhat became the hottest token in crypto back in December, Newport Beach, California-based Stratos launched a liquid fund that held the token, whose mascot is, of course, a dog wearing a beanie. At one point, the token’s price appreciated by more than 300 times, helping the fund post a 137% return in the first quarter, or more than double the gains seen overall in the crypto market. Dogwifhat is down more than 40% from its record high reached last month.

Stratos, which said its limited partners include venture capitalists Marc Andreessen and Chris Dixon, isn’t the only hedge fund to dive into memecoins. Macro heavyweight Brevan Howard has made a “tiny” investment in the sector, according to a person familiar with the matter who wasn’t authorized to speak on the record. Crypto fund Pantera Capital recently wrote that “memecoins are here to stay,” and that “memecoin trading creates gigantic” opportunities. Indeed, memecoins are registering the highest trading volume on so-called decentralized exchanges as of late, according to Dex Screener. The overall market value of memes has swelled to around $54.7 billion, according to data tracker CoinMarketCap.

“The unspoken truth is that if the fund isn’t doing it, the people working at the fund are doing it,” Rennick Palley, founding partner of Stratos, said in an interview. 

Hedge funds have long been active in crypto, attracted by strategies such as the arbitrage trade involving the Grayscale Bitcoin Trust that allowed them to profit from the disparity between the price of Bitcoin and the shares in the trust until that turned negative during the most recent “crypto winter.”

Even so, many crypto participants remain skeptical of memecoins. Unlike more conventional cryptocurrencies, memes aren’t typically tied to specific projects. Most were originally inspired by internet memes, characters, or trends, intended to be light-hearted and fun. That vibe has morphed into a speculative trading strategy led by groups that seek to realize a quick profit after heavily promoting the tokens over social media. 

“It’s just a retail frenzy, it’s just what you’ve seen in GameStop and meme stocks in the traditional markets,” said Quinn Thompson, who founded the hedge fund Lekker Capital, and has experimented with trading meme coins in his own account. “It’s the tip of the spear for speculation. It’s gambling.”

The first meme coin was launched in 2014, and tens of thousands have been created since, with Dogecoin — with a picture of a Shiba Inu — currently the eighth-biggest cryptocurrency, with a roughly $22 billion market value, according to CoinMarketCap. While many retail investors have lost their shirts — and a few made their fortunes — on memecoins, professional investors have mostly stayed away — until the latest crypto boom.

“Meme coins initially started as clearly a joke,” said Cosmo Jiang, a portfolio manager at Pantera. “But over time they’ve evolved as much more than that. People have started to call some memecoins as culture coins, they are a membership into a culture or a group of people with a shared believe system.”

Memes have also became much easier to create and launch, with apps such as Pump.fun allowing users to mint coins in minutes. Blockchains like Solana and Base that offer low trading fees have been overrun with the tokens. Telegram bots, such as Bonkbot, made trading in memes easier. Perhaps most important of all, some memes are now being listed on mainstream exchanges like the Winklevoss twins’ Gemini.

“Since the last cycle, the infrastructure surrounding memecoins has become more robust, with significant improvements in liquidity for several tokens,” said Josh de Vos, research lead at researcher CCData. “Centralized exchanges have developed sophisticated futures markets for leading memecoins, enabling hedge funds to capitalize on their volatile movements and effectively hedge their exposure.”

That has hedge funds feeling more comfortable about following the lead of retail investors and promoters, who have long seen the microscopic prices of most memecoins as an opportunity to quickly post huge returns despite the lack of traditional fundamentals.

Dogwifhat was “almost a rounding error in terms of its initial cost base. That’s how we typically think about memes,” Palley of Stratos said.

As more hedge funds start taking memecoins more seriously, Palley expects the focus of on the highly speculative tokens will only increase.

“People will become more comfortable with the concept over time, not dissimilar to how people became comfortable with crypto overall,” he said. “I wouldn’t be surprised with firms creating meme-only funds, just as they created NFT-only funds.”

That said, NFTs have proven to be unreliable investments, with the market crashing last year. With memes, at least no one claims they are more than a lottery ticket.    

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