What L/S crypto funds actually do

A long/short crypto fund takes both long positions (buying tokens expected to increase in value) and short positions (selling borrowed tokens expected to decrease in value). The combination allows the manager to profit from both rising and falling prices, and to control net market exposure by adjusting the balance between longs and shorts.

In theory, this is the ideal structure. You capture the upside you believe in, hedge the downside you want to avoid, and generate alpha from both sides. In practice, most crypto L/S managers run with persistent net long exposure (typically 40-80% net long), which means they are directionally bullish most of the time. Going meaningfully net short in crypto requires conviction, risk tolerance, and the ability to borrow tokens for shorting, all of which are harder than they sound.

Three sub-types of L/S

Not all long/short funds are the same. The net exposure profile determines the actual risk and return characteristics more than anything in the pitch deck.

The distinction between these sub-types is critical for setting expectations. A long-biased L/S fund with 70% net long will behave almost identically to a long-only fund in most environments. A balanced L/S fund with 30% net long will behave more like a market-neutral strategy. The label “long/short” tells you almost nothing about the actual risk profile. Net exposure tells you everything.

How to tell which sub-type you’re looking at: ask the manager for their historical net exposure data, ideally monthly. If average net exposure over the past 3 years is above 60%, you are investing in a long-biased strategy regardless of what the pitch deck says. If it averages 20-40%, you have a genuinely balanced fund. If it swings from -20% to +80%, you have a tactical manager whose returns will depend heavily on market timing ability.

Why dispersion is so wide

The 156-point gap between the best multi-strategy fund (+108%) and worst (-47.9%) in 2025 was the widest of any category. This extreme dispersion is structural to discretionary L/S, and it happens because of three factors.

Judgment dependence. Unlike quant strategies where the algorithm makes decisions consistently, discretionary L/S depends on a human making the right calls. The same market environment can produce +50% from one manager and -30% from another, depending on their conviction, their timing, and the specific tokens they chose. There is no algorithmic safety net.

Short-side amplification. The short book amplifies both skill and errors. A well-timed short position can generate enormous alpha. A badly timed short in a token that rallies 200% can destroy a year’s worth of long-side gains. The short side adds return potential, but it also adds the possibility of catastrophic individual trade losses.

Conviction sizing. The best L/S managers concentrate their portfolio in 10-20 highest-conviction positions. When they are right, concentrated positioning produces extraordinary returns. When they are wrong, it produces extraordinary losses. More diversified managers produce returns closer to the index, which means more consistent but less differentiated performance.

The short-side problem

Here is the uncomfortable truth about most L/S crypto funds: the alpha comes almost entirely from the long book. The short book, for most managers, is a cost center that provides some hedging but does not generate meaningful positive returns over time.

Why? Crypto has been in a structural bull market for most of its existence. Over any multi-year period from 2017 to 2024, being short crypto was a losing proposition. The tokens that go down tend to go down 80-90% (which is capped gain on the short side) while the tokens that go up can go up 1,000%+ (which is uncapped loss on the short side). The asymmetry punishes systematic short-selling over long periods.

The practical result: many L/S managers who say they can short rarely do in practice. Their “short book” might be 5-10% of the portfolio, providing minimal hedging. During the 2022 bear, many of these managers drew down 30-50% because their short positions were too small to offset their long losses. Their drawdown profile was only marginally better than long-only funds.

The managers who genuinely add value from the short side are rare. They tend to have: a systematic process for identifying short candidates (not just conviction), strict position sizing on shorts (typically smaller than long positions to manage the asymmetric risk), and a willingness to be net short or net flat when conditions warrant. Ask any L/S manager: “What percentage of your historical alpha came from the short book?” If they can’t answer with data, that’s telling.

L/S performance in 2025

2025 was a tough year for discretionary L/S. The multi-strategy category, where most L/S funds sit in our database, averaged -2.4% for the year. 50% of multi-strategy funds posted positive returns, which is better than long-only (0%) but worse than quant (58%).

The year’s narrative arc was challenging for directional managers. Q2’s +29.8% BTC rally rewarded long exposure. But the Q4 selloff (BTC -23.3%, November alone -17.5%) punished anyone who was still long. Managers who added exposure during Q2 and failed to reduce it heading into Q4 gave back their gains and then some.

The best multi-strategy fund returned +108%, likely driven by concentrated positioning during Q2 and effective risk reduction in Q4. The worst lost 47.9%. That 156-point gap is a vivid illustration of why manager selection in this category is more important than strategy selection.

For the full 2025 strategy comparison, see our strategy comparison and annual performance review.

How to evaluate L/S managers

Given the extreme dispersion in this category, evaluation is more important here than for any other strategy. Here are the five criteria that separate the good from the bad.

1. Net exposure history. Request monthly net exposure data going back at least 3 years. Plot it. Does it range from -20% to +60% (genuine L/S) or stay between 50-80% (long-biased with a token short overlay)? The answer tells you what you’re actually buying.

2. Long/short attribution. What percentage of alpha came from longs vs. shorts? A manager who generates 100% of alpha from the long book is not a L/S manager. They are a stock-picker with an expensive hedge. The short book should contribute positively over a full cycle, or at minimum provide meaningful drawdown protection during bear periods.

3. The 2022 drawdown. How much did the fund lose in 2022? If they lost 50%+, their hedging is not working. The median multi-strategy max drawdown in our database is -29.2%. If a fund’s 2022 drawdown was 60%, they are long-biased regardless of what they call themselves. If they launched after 2022 and have no bear market data, adjust your risk estimates upward.

4. Benchmark comparison over a full cycle. Compare the fund’s return to a simple 60/40 BTC/ETH allocation over the same period. If the fund does not meaningfully outperform after fees, you are paying 2/20 for what a spot allocation delivers at 0.25%. The whole point of active L/S management is to beat passive alternatives on a risk-adjusted basis. Verify that it actually does.

5. Conviction sizing discipline. How concentrated is the portfolio? A 50-position fund will produce returns close to the index. A 10-position fund can produce extraordinary returns or extraordinary losses. Neither is inherently better, but you need to know which you are investing in, and whether the manager’s historical Sharpe ratio was achieved at the concentration level they currently run.

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

The ETF question: is L/S still worth 2/20?

This is the existential question for the L/S category, and it became urgent in January 2024 when spot Bitcoin ETFs launched in the US.

Before ETFs, there was no efficient way for most institutional investors to get crypto exposure. You either held spot crypto directly (operational burden, custody risk) or invested in a fund. The fund charged 2/20 for providing access, custody, and risk management. That bundled service was worth the fee because there was no cheaper alternative.

Now there is. A spot Bitcoin ETF at 0.25% annual fee provides pure BTC exposure with institutional custody, regulatory clarity, and daily liquidity. No performance fee. No lock-up. No gates.

This means a L/S crypto fund must now justify its fees by demonstrating one or more of the following: meaningful alpha above Bitcoin on a risk-adjusted basis, materially lower drawdowns than passive BTC exposure, access to the broader crypto ecosystem beyond Bitcoin (altcoin exposure, DeFi, NFTs), or genuine short-side alpha that passive vehicles cannot replicate.

The data from our database gives a mixed verdict. Multi-strategy funds (where most L/S sit) have a median Sharpe of 1.22, which is respectable. Their median beta of 0.44 suggests they are providing something different from pure BTC exposure. But their median max drawdown of -29.2% is still substantial. Whether the net-of-fee Sharpe exceeds what you could get from a simple BTC ETF + Treasury bill barbell depends on the specific manager.

FAQ

What is a long/short crypto hedge fund?

A long/short crypto fund takes both long positions (buying tokens expected to rise) and short positions (selling borrowed tokens expected to fall). The combination allows the manager to profit from both market directions and to control net exposure. In our database, most discretionary L/S funds are classified as Multi-Strategy/Other (82 funds) because they typically run additional approaches alongside their core L/S book.

How did L/S crypto funds perform in 2025?

Multi-strategy funds (where most L/S funds sit) averaged -2.4% in 2025. 50% posted positive returns. The spread between the best (+108%) and worst (-47.9%) was 156 percentage points, the widest of any category. Bitcoin fell 6.3% over the same period, so multi-strategy as a group outperformed BTC by about 4 points. See the annual review for the full analysis.

Should I invest in a L/S crypto fund or just buy a Bitcoin ETF?

Depends on what you want. If you just want crypto beta at the lowest cost, a spot BTC ETF at 0.25% is the clear winner. If you want risk management (lower drawdowns, the ability to be net short during bear markets) and access to altcoin alpha, a good L/S manager adds value. But “good” matters: the median is acceptable, but the bottom quartile is worse than just holding BTC. Due diligence on the specific manager is essential. Compare the fund’s net-of-fee Sharpe to what a simple BTC allocation would have produced.

What Sharpe ratio should I expect from a L/S crypto fund?

The median since-inception Sharpe for multi-strategy funds in our database is 1.22. Above 1.5 is very good for this category. Below 0.8 suggests the fund is not generating enough return for the risk taken. For comparison, quant funds have a median Sharpe of 1.53 and long-only has 0.92. See our Sharpe ratio analysis for the full breakdown.

Where can I find and compare L/S crypto funds?

The CFR Performance Database lets you filter by multi-strategy (where most L/S funds sit) and sort by Sharpe, beta, drawdown, or any of 60+ metrics. The Fund List includes strategy descriptions to help identify which multi-strategy funds run a primarily L/S approach. A free sample is available.