Crypto Funds Move to Market-Neutral as Directional Funds Lag

Crypto hedge funds are narrowing holdings and favoring market-neutral strategies that have returned 2.15% year-to-date, while directional funds are down 5.4% as many managers trim Bitcoin exposure and increase cash allocations.

Fund managers point to a tougher 2026 market environment: Bitcoin is trading well below its October highs, perpetual futures open interest has fallen, and DeFi activity has slowed. Andy Martinez, founder and CEO of Crypto Insights Group, notes a widening performance gap between top- and bottom-quartile managers. Ray Hindi, co-founder and managing partner of L1D, described the climate as “healthy for a very few [funds] and very tough for most.”

Crypto Insights Group data show market-neutral strategies, including statistical arbitrage and yield-focused approaches, produced gains of 2.15% YTD after 14.11% in 2025 and about 19% annualized over the past three years, with smaller drawdowns than directional funds. Directional strategies are down 5.4% so far in 2026; within that group, fundamental directional strategies are down more than quant directional approaches.

Managers and researchers point to asset selection as a key driver of returns. Ryan Watkins, co-founder of Syncracy Capital, reported passive allocations to major crypto assets generally underperformed this year while concentrated bets on a small number of outperformers did better. Richard Galvin, executive chairman and CIO at Digital Asset Capital Management, identified tokens such as Hyperliquid, Morpho and Zcash among stronger performers and reduced his firm's liquid fund Bitcoin weighting over the past two months, keeping roughly 20% of the fund in cash.

Research from Keyrock found about 85% of roughly 118 token launches tracked in 2025 now trade below their opening prices. Amir Hajian, a Keyrock researcher, said every token that launched with a fully diluted valuation above $1 billion is trading below its initial price, and that investors are focusing more on products, users and revenue than on early access.

Institutional limited partners are becoming more selective. Martinez said investors are evaluating a broader set of vehicles — hedge funds, separately managed accounts, onchain vaults, tokenized products and passive options — and asking detailed questions about governance, decision-making, incentives and risk controls. Sanat Rao, CIO of Monarq Asset Management's BTC Fund, reported that many limited partners have largely held exposure and that interest in tokenization and real-world assets remains strong.

Managers report reallocating strategy mixes. Monarq has shifted away from heavy reliance on funding and basis trades toward options volatility arbitrage, tokenized treasury products, real-world assets and other yield strategies that do not depend on market direction, Rao said. Several managers cited statistical arbitrage and DeFi or yield-focused strategies as attractive market-neutral sub-strategies.

Smaller funds face pressure from the current market structure. Rao noted that 78% of crypto funds manage less than $50 million, compared with 38% of traditional hedge funds, and only about 2% of crypto funds have reached $1 billion in assets under management versus 10% for traditional funds. Rao added that sub-$50 million funds lack the fee base to sustain a flat-to-down year. Hajian expects smaller directional funds to struggle as investors gain cheaper beta exposure through exchange-traded funds.

Managers report that retail inflows have not returned in a meaningful way, limiting the likelihood of a broad altcoin rally. Lex Sokolin, co-founder and managing partner at Generative Ventures, and other investors said larger firms are exploring acquisitions, partnerships and other strategic transactions. Several managers expect further consolidation and a smaller number of larger funds over the next 12 months.