For years, DeFi has occupied the confines of institutional strategy, a curiosity for crypto-native funds, and a compliance headache for everyone.
However, regulatory measures are slowly changing this position. Among traditional hedge funds already holding digital assets, 43% now plan to expand into DeFi over the next three years, primarily through tokenized funds, tokenized assets, and direct engagement on the platform.
Nearly 33% of this group expect DeFi to disrupt their current operations in a way that requires adaptation, rather than just incremental adjustments.
The same data set shows that 55% of traditional hedge funds now hold some exposure to crypto, up from 47% in 2024. The figures come from the 2025 Global Crypto Hedge Fund Report, released by AIMA and PwC on November 5.
The report surveyed 122 managers and investors representing $982 billion in assets.
Among hedge funds invested in crypto, 71% plan to increase their allocations over the next twelve months.
The trend is that managers first standardized Bitcoin, Ethereum, and exchange-traded products. They are now exploring how to connect to on-chain liquidity, programmable collateral, and composable infrastructure. DeFi is no longer hypothetical; this is part of the three-year plan.
Efficiency gains in the face of operational unknowns
The appeal is based on the assumption that chain rails can do things that centralized systems can’t do or can’t do well. Derivatives remain the dominant instrument for traditional funds exposed to cryptocurrencies, used by 67% of these funds.
These managers make a living from leverage, hedging, and capital efficiency. The October 10 flash crash, which liquidated more than $19 billion in leveraged positions and severely affected centralized exchanges, left decentralized exchanges relatively unscathed.
Resilience under stress is crucial when your business model relies on liquid, 24/7 markets that remain open on weekends and holidays.
But resilience alone does not explain the placement of the roadmap. DeFi offers programmability, which is represented by collateral that moves instantly, yields that accumulate transparently, and settlement that occurs atomically.
For funds exploring tokenized structures, already a priority for nearly 33% of respondents, DeFi primitives become the infrastructure layer, not a speculative overlay.
Tokenized money market funds and treasuries, already used for liquidity management, represent the regulated route to digital assets. Once a fund’s own shares are tokenized, the question shifts from “should we touch DeFi?” to “which DeFi protocols fit our custody, compliance, and risk frameworks?” »
The vulnerabilities are structural, not theoretical, as legal uncertainty is ranked as the top barrier to tokenization adoption, cited by 72% of respondents.
Smart contract risk, custody standards, and lack of institutional-level audit trails remain unresolved. Even among funds planning a DeFi engagement, 21% view the technology as “irrelevant to our business model” and 7% are concerned that operational risks could reach “unacceptable levels.”
This split reflects a sector in negotiation with itself. For hedge funds, DeFi is important enough to study, but only if the underlying infrastructure works and regulators allow it.
Regulation as an authorization structure
Timing explains the move from observation to implementation. The US SEC’s “Project Crypto”, led by its Chairman Paul Atkins, represents a turning point from enforcement-oriented oversight to framework development.
OCC Interpretive Letter 1183 allows banks to maintain and settle digital assets. The GENIUS Act formalizes the regulation of stablecoins, transforming them from a regulatory gray area into institutional-level settlement tools.
These measures do not resolve all questions, but they establish that on-chain activity can occur within supervised settings.
Traditional hedge funds cite legal and compliance services as the area with the greatest need for improvement, with 40% ranking it first, nearly double the 17% who said the same in 2024.
The prime brokerage, custody and banking channels follow. The importance of these structures indicates that hedge funds need defensible legal opinions, verifiable custody solutions, and counterparties who will not close our books.
DeFi is entering the roadmap precisely because it is starting to look manageable, not because managers have suddenly discovered yield farming.
The institutional investor base confirms the dynamic. Of the allocators surveyed, 47% say the changing U.S. regulatory environment is prompting them to increase their exposure to crypto.
Family offices and high net worth individuals remain the largest investor group for crypto hedge funds, but participation in fund of funds jumped to 39% in 2025, up from 21% in 2024.
Institutional capital from pensions, foundations and sovereign wealth funds has reached 20%, up from 11%. This requires long-lived capital, and DeFi must meet this standard or stay away.
What happens if DeFi becomes infrastructure
If DeFi moves from experimentation to infrastructure, the ripple effects reshape more than funding operations. Custody becomes programmable, with moving collateral based on code execution rather than manual instructions.
Prime brokerage is divided into modular services, with one provider managing legal packaging, another managing on-chain execution, and a third monitoring risk.
Fund administration is done in real time: calculations of the net asset value are carried out continuously, and not at the end of the month, and settlements go from T+2 to atomic finality.
These changes favor funds that can be formed or integrated quickly. Smaller managers, who are already more likely to explore tokenization (37% versus 24% of their larger peers), have access to liquidity and infrastructure previously reserved for billionaire platforms.
Macro strategy funds show the highest DeFi interest at 67%, attracted by the global and always-active nature of on-chain markets. Managers who move first set the standards, and those who wait inherit someone else’s architecture.
On the other hand, the risks accumulate. On-chain transparency exposes strategies that depend on opacity. Composability introduces systemic links, as a hack in a protocol propagates through each integrated position.
Governance tokens blur the line between investment and operational control, creating regulatory ambiguity as to what constitutes a security and who assumes fiduciary duty.
DeFi does not eliminate counterparty risk, but rather redistributes it among code auditors, oracle providers, and protocol developers, none of which fit neatly into existing liability frameworks.
What could derail the thesis?
Regulatory clarity in the United States does not necessarily equate to alignment globally.
The EU’s MiCA framework, Hong Kong’s licensing regime and Singapore’s approach to digital payment tokens all impose different standards.
A fund operating in multiple jurisdictions must reconcile conflicting definitions of what counts as a security, who qualifies as a custodian and when a smart contract constitutes a regulated service.
Interoperability issues, cited by 50% of respondents in EMEA as a barrier to tokenization, reflect this fragmentation.
Technical debt accumulates faster than institutional memory can be maintained. Most DeFi protocols were designed for pseudonymous retail users, not the funds required to perform KYC, deposit SARs, and produce verifiable transaction histories.
Upgrading compliance on permissionless infrastructure is more complex than building compliant systems from scratch, but the liquidity and composability benefits of existing DeFi networks make abandoning it impractical.
The middle path, consisting of permitted forks, hybrid models and regulated front-ends, completely satisfies no one, but could be the only path accepted by regulators and allocators.
Investor demand remains weak compared to institutional ambitions. Among hedge funds interested in tokenization, 41% cite “lack of investor demand” as an obstacle, second only to legal uncertainty.
Allocators want the promises of tokenizing operational efficiencies, but few are willing to be first in line when custody standards, tax treatment, and bankruptcy protection remain unmet.
The chicken-and-egg problem is real: executives won’t take tokens until investors ask for them, and investors won’t ask for them until the infrastructure is proven at scale.
Who controls the access ramp?
The DeFi roadmap is not just a story of technological adoption. It’s about who sets the terms under which traditional finance integrates with on-chain infrastructure.
If hedge funds build their own tokenized structures using DeFi primitives, they control issuance, governance, and fee capture.
If they rely on third-party platforms, such as centralized exchanges offering “DeFi-lite” products, or custodians wrapping permissionless protocols in permissioned interfaces, they cede this control in exchange for regulatory coverage and operational simplicity.
The October 10 flash crash offered a glimpse of what’s at stake. Centralized venues, which concentrate leverage and liquidity, collapsed under cascading liquidations.
Decentralized exchanges, which spread risk among autonomous liquidity pools, absorbed the shock without systemic failure.
The lesson has not escaped managers who spend their careers managing extreme risks. If DeFi infrastructure proves more robust to constraints than centralized alternatives, the transition from roadmap to reality accelerates.
Otherwise, in the event of a major protocol exploit or governance failure that wipes out institutional capital, the three-year time limit extends indefinitely.
The result depends less on technology and more on coordination. Regulators must decide whether to allow hybrid models combining on-chain execution and off-chain compliance. Custodians must create solutions that protect private keys without sacrificing programmability.
Auditors must develop standards to verify the security of smart contracts on an institutional scale. Hedge funds, for their part, must decide whether they want to shape or consume this infrastructure.
The 43% who have DeFi on their roadmap are betting that answers will come on time, and that being sooner rather than later is the winning position.
