Crypto hedge funds are facing their toughest year since the 2022 market crash, as extreme price swings, thin liquidity, and political shocks have disrupted strategies across the sector, according to a report by the Economic Times.
Directional funds, which take long or short positions based on anticipated coin movements, are down around 2.5% through November, marking their weakest performance since the 2022 crypto winter, when many fell 30% or more. Funds focused on altcoins and fundamental, long-term strategies fared worse, losing roughly 23% year-to-date. Only market-neutral funds, which hedge exposure and target small pricing inefficiencies, generated meaningful gains, up about 14%.
The year began with optimism. Regulatory clarity, support from the White House, and billions in institutional capital were expected to drive crypto into the mainstream. Instead, volatility proved unforgiving. Sharp, sudden moves in Bitcoin and other major tokens, often occurring in low-liquidity conditions, made it difficult for funds to establish or exit positions efficiently.
Institutional inflows via ETFs and structured products also reshaped markets. Wall Street firms deepened their crypto presence, tightening spreads and compressing once-lucrative arbitrage trades, including the classic spot-futures carry.
The 10 October crash highlighted crypto’s fragility. Triggered by Donald Trump’s campaign vow to impose 100% tariffs on Chinese goods, bitcoin plunged 14%, wiping out nearly $20bn in leveraged positions within hours. The sudden sell-off caused cascading liquidations, stranded collateral, and highlighted persistent weaknesses in crypto infrastructure.
Altcoin-focused strategies were hit hardest, with dozens of tokens falling 40% or more in hours. Some funds, including Malta-based M-Squared, reported their worst months since the 2022 crash. Meanwhile, market-neutral strategies weathered the storm better, but required extensive infrastructure and careful collateral management to generate modest gains.
By year-end, many funds reduced exposure to altcoins and shifted toward decentralised finance and yield-focused strategies, which posted around 12% gains despite operational and capacity constraints. Managers caution that market participants are likely to approach 2026 with more conservative strategies, reshaping how crypto hedge funds operate going forward.
