Key Points
Crypto hedge funds entered 2025 with renewed confidence and high expectations. After years on the margins of global finance, many managers believed the market was finally turning a corner. Clearer regulations, supportive signals from Washington, and billions of dollars in institutional inflows were supposed to mark a new chapter for digital assets.
Instead, the year delivered a painful reminder of crypto’s unforgiving nature.
By late 2025, crypto hedge funds were on track for their worst performance since the industry’s historic collapse in 2022, battered by an October crash that exposed lingering weaknesses in liquidity, infrastructure, and risk management.
A breakout year that never arrived
At the start of the year, optimism was widespread. Bitcoin’s early rally fueled hopes that professional managers could once again capitalize on volatility. Directional funds — strategies designed to profit from big price swings in Bitcoin and other major tokens — expected a strong environment for returns.
That optimism quickly faded.
Through November, directional crypto hedge funds were down about 2.5%, according to data from Crypto Insights Group. While the losses appear modest, they mark the worst annual showing since the 2022 crypto winter, when many funds lost 30% or more.
The real damage was concentrated elsewhere. Fundamental and altcoin-heavy strategies, which rely on long-term views of blockchain networks and emerging tokens, were down roughly 23%. For many managers, these losses erased years of incremental gains.
Only one corner of the industry escaped relatively unscathed. Market-neutral crypto hedge funds, which aim to stay hedged while exploiting small pricing inefficiencies, gained about 14.4% — one of the few bright spots in an otherwise bruising year.
Liquidity problems undermine classic strategies
Bitcoin’s early-2025 rally offered moments of opportunity, but much of the price action came in sudden bursts when liquidity was thin. These sharp moves made it difficult for funds to build or unwind positions without moving the market against themselves.
At the same time, institutional participation reshaped crypto trading dynamics. Exchange-traded funds and structured products attracted large pools of capital, while Wall Street firms moved deeper into crypto market-making and arbitrage.
That shift compressed spreads and reduced opportunities that once delivered steady profits.
The spot-futures carry trade, often called the basis trade, had long been a reliable source of income for crypto hedge funds. In prior years, it regularly produced double-digit monthly returns. In 2025, those profits shrank dramatically or disappeared altogether.
“Investors are increasingly using structured products with downside protection,” said Paul Howard, a director at market maker Wincent. “That reduces volatility and accelerates alpha decay.”
A fragmented industry under pressure
Despite growing institutional interest, crypto hedge funds remain a fragmented and relatively small segment of the broader asset-management industry. A handful of large players control meaningful capital, but most funds operate on a much smaller scale.
Total assets across active, liquid crypto hedge fund strategies range between $12 billion and $15 billion, according to Crypto Insights Group. The typical fund manages around $30 million, leaving little room for operational mistakes during periods of stress.
Even before October’s turmoil, many managers were struggling. Altcoins failed to deliver the speculative rebound some had hoped for during the summer months. New token launches gained little traction, and retail investor participation remained subdued.
An index tracking altcoin performance fell to its lowest level since the market panic at the start of the 2020 pandemic.
The October crash that changed everything
The pressure reached a breaking point on Oct. 10, one of the fastest liquidation events in crypto’s short history.
Just days after Bitcoin hit a fresh record high, political shockwaves rattled the market. A campaign pledge by Donald Trump to impose 100% tariffs on Chinese goods sparked a sudden risk-off move. Bitcoin plunged roughly 14% in a matter of hours.
Nearly $20 billion in leveraged positions were wiped out almost instantly.
For many crypto hedge funds, the collapse unfolded with breathtaking speed. Thomas Chladek, managing director at Forteus, the asset-management arm of Numeus, recalled watching the chaos unfold mid-flight.
“I was boarding a flight from Asia to Europe,” Chladek said. “I was checking a few managed accounts, and mid-flight everything started collapsing.”
Politics fuels extreme volatility
Several fund managers described 2025 as a year dominated by political uncertainty.
“This year has been defined by Trump volatility,” said Yuval Reisman, founder of Atitlan Asset Management. “We’re seeing erratic bursts tied directly to politics and regulation.”
Directional crypto hedge funds, which rely on discretionary views or quantitative models to predict price movements, saw months of gains erased in a single afternoon. Quantitative strategies focused on altcoins fared even worse.
Thin liquidity amplified losses, and multiple managers described the outcome as total wipeouts.
The crash revealed deeper structural issues. Liquidity vanished as market makers pulled back. Collateral became stranded mid-trade. Risk systems lagged behind the speed of the selloff.
For veterans who lived through the collapses of FTX and Terra Luna, the episode felt disturbingly familiar.
Infrastructure weaknesses resurface
While political headlines may have triggered the selloff, several managers stressed that the scale of the damage reflected internal weaknesses rather than external news alone.
“The tweet may have triggered a risk-off mood, but it’s not responsible for 80% crashes in certain coins,” Chladek said. “The real issue was mismanagement of collateral that triggered cascading liquidations in a dry market after market makers stepped away.”
Altcoin mean-reversion strategies — which assume prices will revert to historical averages — were hit especially hard. During the October crash, dozens of tokens plunged more than 40% in just a few hours, overwhelming models that depended on orderly markets.
Kacper Szafran, founder of Malta-based M-Squared, said his firm has since exited strategies overly dependent on deep altcoin order books.
M-Squared fell 3.5% in October, its worst month since November 2022, but managed a modest recovery later in the year.
Market-neutral funds show resilience
Not all crypto hedge funds suffered equally. Market-neutral strategies weathered the storm better, finishing October with gains of around 2%.
These funds focus on hedged positions and require tight operational controls, advanced systems, and constant oversight. The approach is costly and difficult to scale, but it proved effective during the chaos.
“Funds that were ready, with collateral properly allocated and systems in place, were able to generate 1% to 3% of gross returns in less than an hour,” said Bohumil Vosalik, chief executive of 319 Capital.
His firm posted gains in both October and November, pushing year-to-date net returns above 12%.
A slow evolution of crypto plumbing
The October crash reinforced concerns that crypto market infrastructure is still far from mature.
Trading connectivity broke down. Order-routing systems failed. With no circuit breakers or central clearing mechanisms, losses compounded rapidly.
“Overall, we’re seeing lower liquidity and higher volatility after Oct. 10,” said Peter Kosa, head of growth at Sigil Fund.
Sigil’s altcoin-focused Core fund is down 6.73% this year, its worst performance since a 61% collapse in 2022. Its market-neutral fund, by contrast, is up more than 11%.
Shifting strategies for survival
By year-end, many crypto hedge funds had reduced exposure to altcoins and shifted toward decentralized finance strategies, where fragmentation and yield opportunities still exist.
DeFi and yield-focused funds are up about 12% for the year — a respectable outcome given the broader market turmoil. Even so, managers caution that these strategies face capacity constraints and technical hurdles.
“Some market participants may not re-enter the market with the same force anytime soon,” Szafran said. “This will inevitably reshape how funds approach risk.”
A sobering conclusion for crypto professionals
The struggles of crypto hedge funds in 2025 highlight how far the industry still has to go. Institutional capital and regulatory progress have not eliminated structural weaknesses or reduced extreme volatility.
For professional managers built to thrive in turbulent markets, the year proved especially humbling.
As funds reassess strategies and investors demand stronger controls, the sector may emerge leaner and more disciplined. But the promise of crypto as a stable, mature asset class remains a work in progress — and 2025 served as a costly reminder of that reality.
