Crypto chaos rocks hedge funds in worst year since 2022 crash

After years on the fringes, crypto hedge funds have entered the year 2025 hoping for a breakout.
New regulations, support from the White House, and billions in institutional capital aimed to drag crypto out of the frontier and into the mainstream. Instead, the year exposed crypto’s unforgiving terrain, even for pros built to profit from volatility.

Through November, directional funds — designed to profit from big price swings in Bitcoin and other major coins — are down 2.5%, on track for their worst year in the sector since winter 2022, when many funds fell 30% or more, according to Crypto Insights Group.Fundamental and altcoin-heavy strategies, where managers take bottom-up, long-term views on blockchain networks and tokens, are down about 23% after sharp declines. Only market-neutral funds, which remain hedged and focus on small, steady price differences, have made meaningful gains, up about 14.4%.

Bitcoin’s rally in early 2025 featured a lot of price action, but much of it came in sharp bursts when liquidity was tight. These rapid moves made it difficult for many funds to build or gracefully exit positions.

At the same time, institutional inflows – via ETFs and structured products – have reshaped the playing field. Wall Street firms moved deeper into the crypto markets, tightening spreads and undermining once-lucrative arbitrage opportunities. The payout on classic trades such as spot futures, known as basic trading, shrank dramatically. What used to be reliable double-digit monthly returns became volatile or disappeared altogether. “Investors use structured products with downside protection, which reduces volatility and increases alpha decay,” says Paul Howard, director of market maker Wincent.Crypto hedge funds remain a fragmented niche. While a few large players manage significant amounts, most are much smaller. Total assets of active, liquid strategies are between $12 billion and $15 billion, according to Crypto Insights Group, with the average fund only around $30 million.

Even before the October crash, many funds were struggling. Altcoins failed to achieve a speculative summer rebound. New token launches gained little traction. Retail demand remained subdued. The performance of an index tracking the altcoin hit its lowest level since the 2020 pandemic crash.

Then came October 10 – one of the fastest liquidation events in the short history of crypto. Just days after Bitcoin hit a new high, Donald Trump’s campaign promise to impose 100% tariffs on Chinese goods caused a 14% price drop. Nearly $20 billion in leveraged positions were wiped out in a matter of hours.

For Thomas Chladek, director of Forteus, the asset management division of Numeus, chaos erupted. “I boarded a flight from Asia to Europe,” he said. “I was checking a few managed accounts and mid-flight everything started to collapse.”

This year has been defined by “Trump volatility,” says Yuval Reisman, founder of Atitlan Asset Management. “We are seeing erratic outbursts related to politics and regulations.”

Directional funds, which take long or short positions based on expected price movements using discretionary insights or quantitative models, saw much of the year’s progress wiped out in one afternoon. Quantitative models focused on altcoins – already under pressure from limited liquidity – suffered what several managers called “total wipeouts.”

The damage went deeper than the prices. Cracks appeared in crypto’s infrastructure. Liquidity disappeared. The collateral failed in the middle of trading. Risk systems lagged behind. Veterans of FTX and Terra Luna said the episode felt familiar – and all the more shocking in a supposedly safer, more mature market.

“The Trump tweet may have created a risky mood, but it is not responsible for an 80% crash in certain currencies,” Chladek said. “The problem was collateral mismanagement that led to successive liquidations in a dry market after market makers pulled out.”

Altcoin mean-reversion strategies – which bet that price deviations will decrease in the short term – were hit the hardest. During the October crash, dozens of tokens fell by 40% or more in hours, overwhelming these models.

“We had relatively modest exposure to these strategies, and we have since completely abandoned those that are too dependent on the depth of the altcoin order book,” said Kacper Szafran, founder of M-Squared, a Malta-based multi-manager fund under the Monterra umbrella.

M-Squared fell 3.5% in October – the worst month since November 2022 and the worst since opening to outside capital earlier this year – but recovered to post a 1.6% gain last month.

Market-neutral funds weathered the storm better, closing up around 2% in October. But even here there are limits. These approaches require precise controls, sophisticated infrastructure, and constant monitoring—expensive ingredients that cannot be easily scaled.

“Those who were ready – with collateral well distributed across the exchanges and systems – were able to generate 1% to 3% of gross returns in less than an hour,” says Bohumil Vosalik, CEO of BVI-based 319 Capital. His fund gained 1.5% in October and 0.4% in November, bringing the net return since the start of the year to around 12.2%.

The crash reinforced how slowly the crypto system has matured. Trading connectivity broke down, market makers pulled out, and order routing systems failed. With no circuit breakers or central venting, the damage only increased.

“Overall, we definitely see lower liquidity and higher volatility after October 10,” said Peter Kosa, head of growth at Sigil Fund. Sigil’s Core fund, which focuses on altcoins, is down 6.73% – its worst year since a 61% decline in 2022. Its market-neutral fund ‘Stable’ is up 11.26%.

By year’s end, many funds had reduced exposure to altcos and focused on decentralized finance, where fragmentation and yields still create openings. DeFi and yield-oriented funds are up about 12% – a respectable result in a roaring year – but still limited by technical hurdles and limited capacity.

“Some market participants may not quickly re-enter the market with the same strength,” Szafran said. “This will inevitably reshuffle the playbook.”