Alpha Pursuit in Digital Assets
Applying traditional hedge fund strategies to digital asset investing.
Mar 24, 2025
Institutional interest in digital assets is on the rise, with sophisticated investors worldwide incorporating digital assets into their portfolios. This heightened interest is reshaping traditional portfolio diversification and fueling innovation within established hedge fund frameworks. Talented digital asset fund managers are adapting traditional hedge fund methodologies to capitalize on the unique attributes of this nascent asset class.
In this article, we explore how market-neutral, systematic trading strategies common to traditional hedge fund investing are applied to the digital asset space, underscoring the critical role experienced managers play in navigating this dynamic market.
Market-Neutral Strategies: Non-Directional Investing for Consistent Alpha
Market-neutral strategies enable managers to capitalize on relative performance between assets while reducing exposure to broad market fluctuations. These strategies involve constructing balanced positions to neutralize systemic risk. In traditional markets, for example, an equity manager may offset a long position in undervalued stocks with short positions in overvalued stocks, capitalizing on relative movements.
Digital asset market-neutral strategies exploit inefficiencies across centralized platforms, decentralized platforms, and fragmented liquidity pools. Given the 24/7 nature of digital asset markets, managers can continuously rebalance, adjusting exposure in response to real-time price swings.
Market-neutral strategies provide a compelling alternative for institutional investors seeking exposure to digital assets while limiting downside risk. Historically, digital asset market-neutral funds have stood out from traditional market-neutral funds in that they generate double-digit returns while maintaining low volatility, as illustrated in the chart below.
ANNUALIZED RETURNS VS. VOLATILITY
(Jan 2018 – Dec 2024)
Past performance is not indicative of future results. Data as of December 31, 2024, most recent available for VisionTrack indices. Source for BTC/USD and ETH/USD price: Yahoo Finance. Bonds as represented by iShares Core US Aggregate Bond ETF, which seeks to track the Bloomberg US Aggregate Bond Index; Equities as represented by S&P500 TR Index; Market-Neutral Equity Hedge Funds as represented by HFRI EH: Equity Market Neutral Index; Market-Neutral Crypto Hedge Funds as represented by Galaxy VisionTrack Market Neutral Index.
Algorithmic Trading: Speed and Precision in 24/7 Volatile Markets
Algorithmic trading automates trade execution through pre-coded rules and data analysis, enabling rapid response to market fluctuations. Unlike fundamental investing, these strategies leverage technical indicators and quantitative models to predict short-term market movements. This is the optimal way to trade this 24/7 market without missing key opportunities.
In traditional asset management, hedge fund managers use algorithmic strategies to enhance execution efficiency, manage risk exposure, and exploit short-term mispricings across asset classes. These strategies optimize trade execution by reducing slippage, automating large order flows, and dynamically adjusting positions based on real-time market conditions.
In digital asset markets, algorithmic strategies—particularly market-neutral approaches—are well-suited to capitalize on persistent inefficiencies, liquidity fragmentation, and price dislocations.
Let’s look at some representative strategies.
Market Making: Providing Liquidity in Digital Asset Markets
Market makers play an essential role in stabilizing prices and improving market efficiency by continuously quoting buy and sell prices and facilitating trades.
In traditional finance, high-frequency trading algorithms execute rapid trades across asset classes, profiting from bid-ask spreads.
In digital asset markets, market makers operate similarly to traditional markets, providing liquidity on centralized exchanges (CEXs). These market makers continuously quote buy and sell prices, earning profits from the bid-ask spread while managing risk through real-time adjustments to their positions.
The emergence of decentralized exchanges (DEXs) has created additional opportunities for market makers to provide liquidity. These platforms, operating without intermediaries, deepen liquidity and tighten bid-ask spreads, opening new avenues for profit. Many digital asset market makers also collaborate on projects to facilitate distribution and liquidity for newly launched tokens, for which they are paid token incentives that enhance their trading profits.
Arbitrage and Relative Value: Profiting from Market Inefficiencies
Arbitrage strategies are designed to exploit temporary price discrepancies between identical or similar assets aiming to generate risk-free or low-risk profits. Pure arbitrage is rare, so the term is used broadly to describe both arbitrage and relative value strategies.
In traditional financial markets, arbitrage is widely used in equities, fixed income, and foreign exchange markets, where traders capitalize on pricing differentials due to market fragmentation, liquidity variations, or time lags in price discovery.
Digital asset markets’ 24/7 trading cycle and varying degrees of exchange efficiency create particularly rich opportunities for arbitrage strategies. Unlike traditional markets, where inefficiencies are often short-lived due to high-frequency trading dominance, digital asset markets frequently experience persistent price dislocations due to differences in exchange infrastructure, regulatory restrictions, and liquidity imbalances.
Some key arbitrage strategies employed in digital asset markets include:
Volatility Arbitrage – Exploits differences between implied and realized volatility in options markets. In traditional markets, this is commonly implemented in equity and bond derivatives trading. In digital assets, delta-neutral volatility strategies profit from changes in volatility, rather than price direction, benefiting from crypto's historically high implied volatility.
Statistical Arbitrage – Uses quantitative models to identify mean-reverting opportunities. In traditional equity markets, pairs trading is a common form of statistical arbitrage, where traders go long on an undervalued stock and short on a correlated overvalued stock. In digital assets, mean reversion strategies capitalize on deviations between correlated token pairs, profiting when prices revert to historical norms. For example, a fund might trade bitcoin futures against spot BTC or bitcoin vs. bitcoin mining stocks, leveraging valuation gaps between assets with strong fundamental ties.
Cross-Exchange Arbitrage – Captures price discrepancies for the same digital asset across different exchanges. Traders exploit inefficiencies by purchasing the asset on an exchange where it is undervalued and simultaneously selling it on another exchange where it is overvalued. These price differences arise due to factors like liquidity variations, order book depth, and latency between platforms. In traditional finance, this is analogous to exchange-traded fund (ETF) arbitrage, where traders exploit price misalignments between ETFs and their underlying assets. In digital assets, cross-exchange arbitrage is not limited to centralized exchanges; it can also involve decentralized exchanges when price disparities exist between them.
Basis and Funding Rate Arbitrage – Exploits discrepancies between the perpetual futures price, funding rate and the spot market price. Traders take advantage of price differences by taking offsetting positions in the futures and spot markets, effectively profiting from the funding rate differential. Funding rate basis trading has become increasingly popular in digital assets, taking advantage of crypto-specific opportunities. One example is spot vs. futures basis trading, which can vary by trade duration, how much P&L is harvested from carry vs. price movements, and the number of instruments and venues used.
Private vs. Public Market Arbitrage – Institutional investors with access to OTC desks profit from pricing inefficiencies between private (OTC) and public (exchange-traded) markets. Similar to private equity arbitrage in traditional finance, where off-exchange transactions create valuation differences, digital asset traders leverage price gaps between private placements and exchange-listed tokens.
DeFi Strategies: Unlocking Decentralized Finance Opportunities
Decentralized Finance (DeFi) introduces unique trading strategies unavailable in traditional markets. DeFi protocols, built on blockchain networks, enable peer-to-peer lending, trading, and derivatives without intermediaries, creating new avenues for alpha generation.
Popular DeFi strategies include:
Yield Arbitrage – Investors capitalize on rate differentials across DeFi lending platforms by borrowing tokens at a lower rate on one platform while lending at higher yields on another.
MEV (Maximal Extractable Value) Strategies – Traders profit from transaction reordering advantages on blockchain networks, particularly in DeFi environments.
Delta-Neutral DeFi Trading – This strategy hedges price risk while earning yield from liquidity pools, making it attractive for navigating DeFi volatility.
The Role of Manager Selection in Digital Asset Investing
All hedge funds, whether in traditional or digital asset markets, perform only as well as the people who manage them. Manager selection is therefore one of the most fundamental factors in investing, particularly in digital assets, given the complexity and volatility of the market. Manager experience and expertise significantly influence portfolio returns, and the skill of the fund manager can be the deciding factor between capturing alpha and being caught in market inefficiencies.
A 2023 study found that digital asset fund managers with prior hedge fund experience significantly outperformed peers, generating higher appraisal ratios and risk-adjusted returns. The findings highlight that while crypto-native managers may possess deep technical knowledge, those with traditional hedge fund experience and higher education excel in risk management, execution precision, and strategic allocation—key elements in optimizing performance in volatile environments.
These findings are consistent with the conventional wisdom that manager qualifications and experience play a significant role in fund performance. This is evident in the vast dispersion of 2024 returns between upper quartile and lower quartile digital asset hedge fund managers shown in the following chart, where skill and expertise certainly influenced results.
2024 DIGITAL ASSET HEDGE FUND PERFORMANCE DISPERSION
Source: VisionTrack 2024 performance data for all Active Hedge Funds. Past performance is not indicative of future results.
Rising institutional adoption is reinforcing the need for experienced managers, supported by a shift toward a crypto-friendly U.S. regulatory environment, which has fostered increased capital inflows and improved market structure. As institutional investors demand greater transparency, compliance, and operational rigor, managers with both traditional and digital asset expertise are exceedingly in demand.
Looking Ahead: Institutional Access to Digital Asset Alpha
As digital assets integrate further into institutional portfolios, market-neutral systematic trading strategies provide structured avenues for exposure to the asset class. These strategies—rooted in traditional hedge fund methodologies—allow investors to navigate digital asset volatility while pursuing strong risk-adjusted returns.
For those seeking to explore the alpha potential in digital assets without the full volatility of directional exposure, market-neutral strategies remain a compelling investment thesis.
At Samara Alpha Management, we specialize in curating and managing diversified portfolios of market-neutral digital asset strategies. The managers in which we invest rely on traditional hedge fund strategies applied to digital asset investing, in addition to those unique to crypto, to generate attractive risk-adjusted returns. Our fund-of-funds structure with monthly liquidity allows us the flexibility to pivot between strategies as markets fluctuate, enabling sophisticated investors to capitalize on evolving opportunities while mitigating risk.
Watch CIO Adil Abdulali take a deeper dive into some of these strategies, including market-making, exchange arbitrage, and statistical arbitrage. Adil also talks about Decentralized Finance (DeFi) strategies, specific to the digital asset space.
Contact us to learn more about our manager selection process, risk management approach, or our fund performance.
*Diversification does not ensure profit or protect against loss.
