As 2025 nears its end, crypto hedge funds are poised to report their most dismal annual performance since the significant downturn in 2022. Recent data indicates that these funds have suffered a staggering 23% decline throughout the year, primarily due to adverse market conditions.
Notably, the $2 billion flash crash on October 10 and the deterioration of basis trades have severely impacted institutional fund arbitrage gains. In stark contrast, market-neutral funds, which adopt a hedged approach, have managed to achieve an impressive return of 14.4% by navigating the year”s limited liquidity spikes.
Taking a closer look at the strategies being employed, it is essential to differentiate between the three main types of hedge funds currently operational in the cryptocurrency sector:
- Directional Funds: These funds focus on specific price movements but have been caught off guard by aggressive market swings in 2025, leading to significant losses.
- Fundamental Funds: Adopting a venture capital-style approach, these managers select assets based on their technical utility and team strength. However, their performance has suffered as altcoins have declined against the dominance of Bitcoin.
- Market-Neutral Funds: These funds pursue profit irrespective of price fluctuations by employing strategies such as the basis trade. They are the sole beneficiaries of the current market downturn.
The basis trade decay has been a critical factor in the struggles of directional funds, which have encountered a 2.5% decline, while fundamental-focused funds have plummeted by 23% through November 2025. Despite expectations that 2025 would be a breakout year, supported by institutional entry and governmental backing, the reality has unfolded as a liquidity trap.
Although Bitcoin achieved an all-time high of $126,000 in October 2025, the price movements were characterized by thin liquidity bursts, making it challenging for institutional investors to enter or exit positions without incurring substantial slippage. This deterioration of the basis trade has led to a significant evaporation of previously lucrative trading opportunities.
The downturn in the crypto market has been exacerbated by broader macroeconomic challenges. As noted by Cardano founder Charles Hoskinson, the politicization of crypto ahead of the 2026 midterm elections has delayed the anticipated supercycle that many had hoped for in 2025. This political climate is creating uncertainty for funds looking to capitalize on the market.
Looking ahead to 2026, a report from the Crypto Insights Group suggests that the upcoming year will present an environment where crypto hedge funds must focus more on strategy enhancement rather than merely initiating exposure. The evolution of regulatory frameworks is making digital asset investing more accessible, yet the standards for institutional participation are becoming increasingly stringent.
By the end of 2025, it is clear that active management will be shaped by the preparedness of funds to meet these higher expectations, as the landscape of crypto investment continues to evolve.
