The Funding: What has changed for crypto hedge funds since last October's crash?

Nearly a year after the record liquidation event on Oct. 10, 2025, crypto hedge funds are still dealing with its effects. Market liquidity has not fully recovered, fund performance varies widely and managers see limited progress on some of the problems the crash exposed.

"The market never really got its depth back so books are thinner, market makers carry less inventory, and every sharp move has more air under it than it used to," said Leigh Drogen, general partner and chief investment officer at Starkiller Capital.

The flash crash wiped out more than $19 billion in leveraged positions. Earlier editions covered what went wrong, the pressure on markets that followed, how funds changed their strategies and whether a recovery was taking hold.

The recent rally has helped, but much of the market remains below pre-crash levels. Only 11 of the top 50 assets, excluding stablecoins and pegged assets, are trading higher, said Richard Galvin, executive chairman and chief investment officer at Digital Asset Capital Management. Spot and futures volumes hit new cycle lows in July, down 60% to 70% from pre-Oct. 10 levels, he said.

For Galvin's funds, the harder part was the market continuing to fall over the next six months while equities and other assets did well. He called it "one of the most difficult periods for us as managers and our investors since we launched our funds in 2018."

Galvin's funds are not alone in facing a difficult market. Fund performance is uneven despite the recent rally. Among fundamental funds, the median fund remains in the red this year, said Andy Martinez, founder and CEO of Crypto Insights Group (CIG). CIG's data through August show a year-to-date return of 56.6% at the top decile of fundamental funds, compared with a 13.4% loss at the bottom decile, marking a 70-percentage-point gap between the top and bottom deciles. Martinez said some managers with concentrated holdings have done well as revenue-generating assets gain more attention.

The gap also shows in quant directional funds. Through August, the year-to-date return at the top decile was 36.8%, compared with a 13.6% loss at the bottom decile. For market-neutral funds, the return at the top decile was 9.9%, compared with a 2% loss at the bottom decile.

Over the longer period from January 2025 through August 2026, quant directional strategies gained a cumulative 30.2% and market-neutral strategies gained 20%, based on CIG's average monthly returns. Fundamental strategies were still down 25%, even after a strong rebound in August. Market-neutral performance was steadier, while fundamental and quant directional strategies had larger swings.

The crash also left funds with fewer opportunities in some trades. Martinez said low funding rates meant funding and basis arbitrage trades that many funds relied on stopped producing meaningful returns. At the smaller end of the industry, managers generally running less than $2 million in assets have quietly closed, he said.

Crypto has also been competing with AI for investment money. "The biggest headwind has been capital flows going after AI, at the expense of all industries, not just blockchain. The 10/10 event certainly accelerated that for blockchain," said Cosmo Jiang, general partner at Pantera Capital.

What has changed?

After the crash, investors called for stronger price oracles, better liquidation systems and greater transparency. Managers see mixed progress.

"The plumbing is marginally better, but we have the same fundamental problems," Drogen said. Some venues tightened liquidation engines and margin requirements, but auto deleveraging remains difficult to solve, he said. "The problem was correlated leverage stacked on fragmented liquidity, and that hasn't changed."

Galvin sees some progress on price oracles and said more spot and futures trading is moving to decentralized venues as traders look for greater transparency. His funds have also increased trading on these venues as better interfaces and liquidity make it easier, and often cheaper, to trade onchain, he said.

For some managers, the crash changed which trades they were willing to take. Scott Phillips, founder of HyperTrend, a crypto proprietary trading firm with about $20 million under management, said it removed hedged funding strategies from its plans after seeing the risk of sudden, severe losses. The firm instead chose other quantitative trades that he described as less risky.

Starkiller's strategies haven't changed, Drogen said, but the underlying business now matters more alongside its trend and momentum signals.

"On the long side it's kept us out of trends that looked alive but were dead underneath and fell apart quickly," he said. "On the short side it's the difference between shorting something that's actually broken and shorting something that's just down a lot."

Investor interest is slowly returning too. Drogen said Starkiller is seeing new investors in its liquid fund, while its yield fund continues to attract steady interest. Galvin reported modest net inflows but said crypto needs to perform strongly through year-end before institutions commit larger amounts. But Drogen said the larger wave of fresh money has yet to arrive.

Martinez said market-neutral strategies have continued to attract interest, while interest in fundamental strategies is returning as markets move higher.

"We're now working with some of the largest institutions globally, several of which are quietly building plans to allocate to active strategies and have begun diligence on managers," he said.

Managers are also positioned for further gains. Galvin said his funds have been effectively fully allocated since mid-August, with no bitcoin and their biggest positions in revenue-generating DeFi applications. Drogen's liquid fund remains long. Phillips said HyperTrend's quantitative systems are net long, with a bias toward DeFi projects and consistent positions in NEAR Protocol (NEAR), Ethena (ENA), Hyperliquid (HYPE) and Zcash (ZEC).
Managers are also finding opportunities beyond crypto tokens. Martinez said more managers are trading tokenized assets, with trading spread across venues creating new opportunities. Phillips also highlighted tokenized stock perpetuals.

"I am extremely bullish about crypto for the next year," Phillips said.

Could it happen again?

Drogen said another Oct. 10 is possible. "No one really knows the full picture of who and how many firms are really the liquidity underneath this market," he said.

Galvin said the risk of a crash that size is low because leverage is well below last October's peak. Exchanges also handle a wider mix of assets, including stocks and commodities, making their exposures less closely linked and offering some protection, he said.

Another liquidation shock is not the only concern. Phillips said hacking risk, especially from advanced AI models, remains a key worry. He also pointed to possible changes in the U.S. policy environment if Democrats win back political power.

Drogen said markets can become more exposed to sharp falls as automated trading grows and fewer investors step in to buy based on fundamentals. But he also said today's leading tokens have more of those buyers because of their stronger fundamentals.

Some managers said the crash helped clear out weaker projects. Phillips called it "a much needed cleansing of uneconomic projects." Drogen said tokens with little real demand never recovered, while assets with stronger economics and tokenomics now lead the market.

"Going forward, the only stuff that will sustainably matter over the long term are protocols with product market fit and unit economics that support value capture," Jiang said. "We're seeing this across L1s, DeFi and AI-related use cases the most."

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