Bitcoin swings derail crypto hedge funds despite regulatory optimism

Crypto hedge funds came into 2025 expecting new regulations and support from the White House under President Donald Trump, and billions flowing in from institutions. None of that helped the market though.

Bitcoin punished almost every strategy that aimed to profit from big price swings. Directional crypto funds ended November down 2.5%, putting them on track for their weakest year since many dropped more than 30% three years ago.

The pain spread well beyond these funds. Long-term, research-heavy strategies that filled portfolios with blockchain projects and altcoins fell about 23% after severe drawdowns. Only the cautious players made it out ahead.

According to Crypto Insights Group, quant models built around altcoins broke down as liquidity disappeared, akin to the chaos during the FTX and Terra Luna crash of 2022, saying the market felt far less mature than many had assumed.

Bitcoin’s early rally created plenty of movement but very little usable liquidity. Price jumps came fast and disappeared just as quickly, making it hard for managers to enter or exit without slipping.

At the same time, institutional money poured in through ETFs and structured products. Wall Street firms tightened spreads and ate into once-profitable arbitrage trades.

The long-loved spot-futures carry, known as the basis trade, delivered almost nothing. What used to give reliable double-digit returns each month barely produced scraps.

Trouble appeared even before the fall sell-off. Altcoins failed to produce a summer run. Token launches stalled. Retail stayed quiet. An index tracking the performance of alternative coins hit its lowest level since the 2020 pandemic. Managers were waiting for momentum that never came.

October crash wipes out positions and exposes weak systems

Everything worsened on Oct. 10, when Trump’s campaign pledge to impose 100% tariffs on Chinese goods pushed Bitcoin down 14% within hours. Close to $20 billion in leveraged positions vanished.

For Thomas Chladek, managing director at Forteus, the meltdown hit while he was in the air. “I was boarding a flight from Asia to Europe,” Chladek said. “I was checking a few managed accounts and mid-flight everything started collapsing.”

Chladek said, “The Trump tweet may have triggered a risk-off mood, but it’s not responsible for an 80% crash in certain coins. The issue was mismanagement of collateral that triggered cascading liquidations in a dry market after market makers pulled out.”

Yuval Reisman, founder of Atitlan Asset Management, described the year as driven by “Trump volatility,” with sudden moves tied to policy and politics.

Altcoin mean-reversion funds, which depend on short-term price corrections, were hit the hardest. Many tokens dropped more than 40% in hours. Kacper Szafran, founder of M-Squared, said his company shut down strategies that relied too much on thin order books. M-Squared fell 3.5% in October, its worst result since November 2022, before posting a 1.6% gain last month.

Meanwhile, market-neutral funds avoided most of the damage. Bohumil Vosalik, chief executive of 319 Capital, said funds with well-placed collateral “were able to generate 1% to 3% of gross returns in less than an hour.” His company closed October up 1.5% and November up 0.4%, bringing year-to-date gains to 12.2%.