What long/short crypto funds actually do

A long/short crypto hedge fund buys tokens it expects to go up (“long positions”) and sells short tokens it expects to go down (“short positions”). The combination allows the fund to profit from both rising and falling prices, at least in theory. In practice, most L/S crypto funds carry net long exposure most of the time, meaning they have more long positions than short positions. They are directional with a hedge, not truly market-neutral.

The long side is straightforward: the manager identifies tokens they believe are undervalued or have catalysts ahead (protocol upgrades, ecosystem growth, regulatory tailwinds) and buys them. The short side is more complex: the manager identifies tokens they believe are overvalued, have deteriorating fundamentals, or face negative catalysts, and borrows them to sell. Shorting in crypto is technically possible through futures, perpetual swaps, and token borrowing on centralized exchanges, though the mechanisms are less mature than in equities.

The fund’s net exposure (long positions minus short positions as a percentage of NAV) determines how much market risk the portfolio carries. A fund with 100% long and 30% short has 70% net exposure. It will go up roughly 70% as fast as the market when crypto rises and down 70% as fast when it falls. The lower the net exposure, the less directional the fund, and the more it depends on stock selection (picking the right longs and shorts) rather than market direction.

The three sub-types of L/S crypto

Long-biased L/S is the most common. The fund maintains significant net long exposure and uses short positions primarily as hedges rather than as alpha sources. In a bull market, these funds look great because they capture most of the upside. In a bear market, the hedges reduce losses versus long-only, but the fund still draws down significantly. Most of the crypto L/S funds you will encounter are in this category, even if they describe themselves as “long/short” without the “biased” qualifier.

Balanced L/S maintains lower net exposure and depends more on stock selection (picking which tokens to be long and which to be short) than on market direction. These funds tend to have lower returns in bull markets but significantly better drawdown profiles. They are the most institutionally appropriate sub-type because their risk profile is more predictable.

Tactical L/S varies net exposure actively, sometimes being heavily long, sometimes heavily short, sometimes close to flat. This is essentially market timing, and it is the highest-risk sub-type because it requires the manager to get both direction and timing right. When it works, the results are spectacular. When it does not, the losses can be severe because the manager was positioned aggressively in the wrong direction.

Why manager dispersion is so wide

The 50-80 percentage point gap between the best and worst L/S managers in a given year requires explanation. No other strategy category has this level of dispersion. Here is why.

L/S is the most judgment-dependent strategy. Quant funds follow models. Market-neutral funds exploit structural inefficiencies. Long-only funds hold a basket. But L/S is fundamentally about a human portfolio manager making calls: which tokens to buy, which to short, how much net exposure to carry, when to cut losses, when to let winners run. These are all judgment calls, and the quality of judgment varies enormously across managers.

The short side amplifies dispersion. If Manager A shorts a token that goes up 300%, that is a massive loss. If Manager B shorts the same token and it goes to zero, that is a massive win. The same position can produce wildly different outcomes depending on timing and sizing. Short positions in crypto are particularly dangerous because crypto tokens can appreciate 10-100x, creating unlimited theoretical loss potential.

Conviction sizing matters. Two managers might both identify Solana as an attractive long in Q1 2025. Manager A puts 5% of NAV into it. Manager B puts 25%. If Solana doubles, Manager A makes 5 percentage points. Manager B makes 25 percentage points. Same idea, 5x different impact. L/S managers who size their highest-conviction positions aggressively have more extreme outcomes (both positive and negative) than those who spread their bets evenly.

This dispersion is the reason why manager selection in L/S matters more than in any other category. Picking the average L/S fund gives you average results (42% in 2025). Picking the right L/S fund gives you 80-100%+. Picking the wrong one gives you losses. The difference is worth the investment in thorough due diligence. See our due diligence checklist for the framework.

The short-side problem

The single most important question to ask any L/S crypto fund manager: “How much of your return comes from the short book?”

In traditional equity L/S, the best managers generate meaningful alpha from both the long and short sides. In crypto L/S, the short side is structurally more difficult for several reasons. Borrowing tokens for shorting is more expensive and less reliable than in equities. The borrow market is fragmented across exchanges. Crypto tokens can rally 10-100x, creating asymmetric risk on the short side. And the structural uptrend in crypto over long periods means that shorts are fighting the tide most of the time.

As a result, many L/S crypto managers generate virtually all of their returns from the long book. Their short positions are hedges that lose money slowly rather than alpha sources that make money. This is not necessarily bad, but it means the fund is really a “long with hedges” fund, not a true long/short fund. If 100% of the alpha comes from the long side, you should evaluate it accordingly: are you paying 2/20 for token selection skill, or are you paying 2/20 for market beta that you could get from an ETF at 0.20%?

The L/S funds that genuinely generate short-side alpha are rare and valuable. They typically have a strong research process for identifying overvalued tokens, disciplined position sizing on shorts, and the willingness to be net short during corrections. These managers exist, but they are the minority. Finding them requires looking at the actual contribution analysis (what percentage of returns came from long vs. short positions), which the manager should be willing to share in due diligence.

How to evaluate an L/S crypto fund

Look at net exposure over time. Consistent high net exposure (70%+) means you are mostly buying beta. Variable net exposure suggests active management. Request the monthly net exposure history and see whether the manager actually adjusts exposure based on market conditions.

Ask for long/short attribution. What percentage of returns came from the long book? What percentage from the short book? What were the best and worst short positions? A manager who cannot answer these questions transparently is a red flag.

Evaluate the 2022 drawdown. How much did the fund lose in 2022? A long-biased fund losing 45% is expected. A fund that marketed itself as “balanced L/S” but lost 55% was not really balanced. The 2022 bear market is the definitive test of whether an L/S manager’s hedges actually work. See our bear market performance analysis for context.

Compare against a simple benchmark. Take the fund’s return and subtract what you would have earned from a passive BTC/ETH allocation at the same average net exposure. The difference is alpha. If the alpha is negative or negligibly small, the fund is not adding value over a cheaper passive approach. This is the most important analytical exercise for any L/S fund evaluation.

Assess conviction sizing. Ask for the top 5 positions as a percentage of NAV. A concentrated fund (top 5 positions = 40%+ of NAV) will have more volatile performance than a diversified fund (top 5 = 15% of NAV). Neither is inherently better, but you should know which you are getting and whether the concentration matches your risk tolerance.

For the complete evaluation framework, see our manager evaluation guide.

The existential question: L/S vs. ETF + alpha

The most sophisticated institutional allocators are increasingly asking: “Instead of paying 2/20 for an L/S crypto fund that is 70% beta and 30% alpha, why not get the beta from an ETF at 0.20% and pay for alpha separately through a market-neutral or quant fund?”

This “portable alpha” approach is well-established in traditional finance. You separate beta (the market return, which is cheap) from alpha (the excess return, which is expensive). In crypto, this means: buy $70 of IBIT for the beta, and allocate $30 to a market-neutral fund for the alpha. The total cost is lower, the alpha source is more efficient (market-neutral funds have a 2.10 Sharpe vs. L/S’s 1.30), and the portfolio is more transparent.

The counterargument from L/S managers: their alpha comes specifically from the interaction between long and short positions within crypto. The short book is not just a hedge; it is an expression of relative value views (long SOL, short ETH as a relative trade, for example) that cannot be replicated by combining an ETF with a market-neutral fund. This is true for the best L/S managers. For the average L/S manager whose short book loses money and whose long book is highly correlated with BTC, the portable alpha approach is strictly better.

For most allocators, the practical implication is: raise the bar for L/S fund selection. Do not accept L/S funds that are functionally long-only with high beta. Demand evidence of genuine alpha, whether from short-side contribution, superior long-side selection, or meaningful risk management that reduces drawdowns. The ETF has set the new baseline for crypto beta. L/S funds must clear that baseline to earn their fees.

For how different strategies compare on all dimensions, see our strategy comparison. For realistic return expectations, see our expected returns guide.

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Complete list of crypto hedge funds · Top quant crypto funds · Market-neutral crypto funds · Performance by strategy · Sharpe ratios explained · Understanding drawdowns · How to evaluate a crypto hedge fund