From experiment to blueprint: Why 43% of hedge funds plan integration with DeFi
For years, DeFi occupied the sides of institutional technique, a curiosity for crypto-native funds, and a compliance headache for everybody else.
However, regulatory strikes are slowly altering this stance. Among conventional hedge funds already holding digital belongings, 43% now plan to broaden into DeFi over the subsequent three years, primarily by tokenised funds, tokenised belongings, and direct platform engagement.
Nearly 33% of this group expects DeFi to disrupt their present operations in ways in which necessitate adaptation, relatively than simply incremental changes.
The similar dataset reveals that 55% of conventional hedge funds now maintain some crypto publicity, up from 47% in 2024. The numbers are from the 2025 Global Crypto Hedge Fund Report, revealed by AIMA and PwC on Nov. 5.
The report surveyed 122 managers and traders representing $982 billion in belongings.
Of these hedge funds invested in crypto, 71% plan to improve their allocations over the subsequent twelve months.
The sample is that managers first normalized Bitcoin, Ethereum, and exchange-traded merchandise. Now, they’re mapping how to plug into on-chain liquidity, programmable collateral, and composable infrastructure. DeFi is now not hypothetical; it’s half of the three-year plan.
Efficiency features towards operational unknowns
The enchantment rests on the belief that on-chain rails can do issues that centralized techniques can’t, or can’t do nicely. Derivatives stay the dominant instrument for conventional funds with crypto publicity, utilized by 67% of these funds.
These managers dwell on leverage, hedging, and capital effectivity. The Oct. 10 flash crash, which liquidated over $19 billion in leveraged positions and severely impacted centralized exchanges, left decentralized exchanges comparatively unscathed.
Resilience below stress is essential when what you are promoting mannequin depends on liquid, 24/7 markets that stay open all through weekends and regulatory holidays.
But resilience alone doesn’t clarify the roadmap placement. DeFi affords programmability, which is represented by collateral that strikes immediately, yields that accrue transparently, and settlement that occurs atomically.
For funds exploring tokenized buildings, already a precedence for almost 33% of respondents, DeFi primitives turn into the infrastructure layer, not a speculative overlay.
Tokenized cash market funds and treasuries, already in use for liquidity administration, signify the regulated on-ramp for digital belongings. Once a fund’s personal items are tokenized, the query shifts from “ought to we contact DeFi?” to “which DeFi protocols match our custody, compliance, and danger frameworks?”
The vulnerabilities are structural, not theoretical, as authorized uncertainty is ranked as the highest barrier to tokenization adoption, cited by 72% of respondents.
Smart contract danger, custody requirements, and the absence of institutional-grade audit trails stay unresolved. Even amongst funds planning DeFi engagement, 21% view the know-how as “irrelevant to our enterprise mannequin,” and seven% fear operational dangers might attain “unacceptable ranges.”
The cut up displays a sector in negotiation with itself. For hedge funds, DeFi issues sufficient to research, however provided that the underlying infrastructure works and regulators allow it.
Regulation as a permission construction
Timing explains the shift from statement to implementation. The US SEC’s “Project Crypto,” led by Chair Paul Atkins, represents a pivot from enforcement-first oversight to framework-building.
The OCC’s Interpretive Letter 1183 permits banks to custody and settle digital belongings. The GENIUS Act formalizes stablecoin regulation, reworking them from a regulatory grey space into institutional-grade settlement instruments.
These strikes don’t resolve each query, however they set up that on-chain exercise can happen inside supervised parameters.
Traditional hedge funds cite authorized and compliance companies as the realm in best want of enchancment, as 40% rank it first, almost double the 17% who mentioned the identical in 2024.
Prime brokerage, custody, and banking rails comply with. The significance of these buildings signifies that hedge funds want defensible authorized opinions, auditable custody options, and counterparties who is not going to shut our accounts.
DeFi enters the roadmap exactly as a result of it’s beginning to look supervisable, not as a result of managers all of the sudden found yield farming.
The institutional investor base confirms the dynamic. Among allocators surveyed, 47% say the evolving US regulatory atmosphere is prompting them to improve crypto publicity.
Family workplaces and high-net-worth people stay the most important investor group for crypto hedge funds, however fund-of-funds participation jumped to 39% in 2025 from 21% in 2024.
Institutional capital from pensions, foundations, and sovereign wealth funds reached 20%, up from 11%. It calls for long-duration capital, and DeFi should meet that commonplace or stay sidelined.
What occurs if DeFi turns into infrastructure
If DeFi transitions from experiment to infrastructure, the ripple results reshape greater than fund operations. Custody turns into programmable, with collateral transferring primarily based on code execution relatively than handbook instruction.
Prime brokerage splits into modular companies, with one supplier dealing with the authorized wrapper, one other managing on-chain execution, and a 3rd monitoring danger.
Fund administration goes real-time: NAV calculations happen constantly, not at month-end, and settlement transitions from T+2 to atomic finality.
These modifications favor funds that may construct or combine shortly. Smaller managers, who’re already extra probably to discover tokenization (37% versus 24% of their bigger friends), achieve entry to liquidity and infrastructure beforehand reserved for billion-dollar platforms.
Macro technique funds present the best DeFi curiosity at 67%, drawn to the worldwide, always-on nature of on-chain markets. The managers who transfer first set the requirements, and those who wait inherit another person’s structure.
On the opposite hand, the dangers pile up. On-chain transparency exposes methods that rely on opacity. Composability introduces systemic linkages, as a hack in a single protocol propagates by each built-in place.
Governance tokens blur the road between funding and operational management, creating regulatory ambiguity concerning what constitutes a safety and who holds fiduciary responsibility.
DeFi doesn’t get rid of counterparty danger, however relatively redistributes it throughout code auditors, oracle suppliers, and protocol builders, none of whom match neatly into current legal responsibility frameworks.
What might derail the thesis?
Regulatory readability within the US doesn’t essentially equate to world alignment.
The EU’s MiCA framework, Hong Kong’s licensing regime, and Singapore’s strategy to digital cost tokens all impose totally different requirements.
A fund working throughout jurisdictions should reconcile conflicting definitions of what counts as a safety, who qualifies as a custodian, and when a wise contract constitutes a regulated service.
Interoperability points, cited by 50% of EMEA-based respondents as a barrier to tokenization, mirror this fragmentation.
Technical debt accumulates quicker than institutional reminiscence will be retained. Most DeFi protocols have been designed for pseudonymous retail customers, not for funds required to conduct KYC, file SARs, and produce auditable transaction histories.
Retrofitting compliance onto permissionless infrastructure is extra complicated than constructing compliant techniques from scratch, however the liquidity and composability benefits of current DeFi networks make abandonment impractical.
The center path, composed of permissioned forks, hybrid fashions, and controlled front-ends, satisfies nobody utterly however stands out as the solely path that regulators and allocators each settle for.
Investor demand stays skinny relative to institutional ambitions. Among hedge funds excited by tokenization, 41% cite “lack of investor demand” as a barrier, second solely to authorized uncertainty.
Allocators need the operational effectivity tokenization guarantees, however few are prepared to be first movers when custody requirements, tax therapy, and chapter protections stay unsettled.
The chicken-and-egg downside is actual: managers is not going to tokenise till traders ask for it, and traders is not going to ask till the infrastructure proves itself at scale.
Who controls the on-ramp?
The DeFi roadmap is not only a narrative of know-how adoption. It is a query of who units the phrases below which conventional finance integrates with on-chain infrastructure.
If hedge funds construct their very own tokenized buildings utilizing DeFi primitives, they management issuance, governance, and price seize.
If they depend on third-party platforms, equivalent to centralized exchanges providing “DeFi-lite” merchandise, or custodians wrapping permissionless protocols in permissioned interfaces, they cede that management in change for regulatory cowl and operational simplicity.
The Oct. 10 flash crash supplied a preview of the stakes. Centralized venues, which focus leverage and liquidity, buckled below cascading liquidations.
Decentralized exchanges, which distribute danger throughout autonomous liquidity swimming pools, absorbed the shock with out systemic failure.
The lesson was not misplaced on managers who spend their careers managing tail danger. If DeFi infrastructure proves extra sturdy below stress than centralized alternate options, the shift from roadmap to actuality accelerates.
If it doesn’t, within the occasion of a serious protocol exploit or governance failure that wipes out institutional capital, the three-year timeline extends indefinitely.
The final result relies upon much less on know-how than on coordination. Regulators should determine whether or not to allow hybrid fashions that mix on-chain execution with off-chain compliance. Custodians should construct options that shield non-public keys with out sacrificing programmability.
Auditors should develop requirements for verifying the safety of good contracts at an institutional scale. Hedge funds, for his or her half, should determine whether or not they need to form or devour that infrastructure.
The 43% who put DeFi on their roadmap are betting that the solutions will arrive in time, and that being early, relatively than late, is the successful place.
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