For years, DeFi was concerned with the limits of institutional strategy, a curiosity for crypto-native funds, and a compliance headache for everyone else.
However, regulatory measures are slowly changing this position. Of traditional hedge funds that already own digital assets, 43% now plan to expand into DeFi over the next three years, primarily through tokenized funds, tokenized assets and direct platform involvement.
Nearly 33% of this group expect DeFi to disrupt their current businesses in ways that require adaptation, rather than just incremental adjustments.
The same dataset shows that 55% of traditional hedge funds now have some exposure to cryptocurrencies, up from 47% in 2024. The figures come from the Global Crypto Hedge Fund Report 2025, published by AIMA and PwC. on November 5.
The report surveyed 122 executives and investors representing $982 billion in assets.
Of hedge funds investing in crypto, 71% plan to increase their investments over the next twelve months.
The pattern is that managers first normalized Bitcoin, Ethereum, and exchange-traded products. Now they are mapping out how they can connect to on-chain liquidity, programmable collateral and composable infrastructure. DeFi is no longer hypothetical; it is part of the three-year plan.
Efficiency gains compared to operational unknowns
The appeal rests on the assumption that rails on the chain can do things that centralized systems cannot do or cannot do well. Derivatives remain the dominant tool for traditional funds with cryptocurrency exposure, used by 67% of these funds.
These managers make a living from leverage, hedging and capital efficiency. The October 10 sudden crash, which liquidated more than $19 billion in leveraged positions and severely affected centralized exchanges, left decentralized exchanges relatively unscathed.
Resilience under stress is critical when your business model relies on liquid, 24/7 markets that remain open on weekends and legal 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 accrue 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 government bonds, already in use for liquidity management, represent the regulated on-ramp for digital assets. Once a fund’s native units 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 and not theoretical, as legal uncertainty is considered the biggest barrier to tokenization adoption, cited by 72% of respondents.
The smart contract risk, custody standards and lack of audit trails at the institutional level remain unresolved. Even among funds planning DeFi involvement, 21% view the technology as “irrelevant to our business model,” and 7% fear operational risks could reach “unacceptable levels.”
The split reflects a sector that is negotiating with itself. For hedge funds, DeFi is important enough to study, but only if the underlying infrastructure works and regulators allow it.
Regulation as a consent structure
Timing explains the shift from observation to implementation. The US SEC’s “Project Crypto”, led by Chairman Paul Atkins, represents a pivot point from enforcement oversight to framework building.
The OCC’s Interpretive Letter 1183 allows banks to take custody and settle digital assets. The GENIUS Act formalizes the regulation of stablecoins, transforming them from a regulatory gray area into institutional-quality settlement tools.
These steps do not solve all questions, but they do establish that activities in the chain can take place within controlled parameters.
Traditional hedge funds cite legal and compliance services as the area most in need of improvement, with 40% ranking it first, almost double the 17% who said the same in 2024.
Prime brokerage, custody and bank rails follow. The importance of these structures indicates that hedge funds need defensible legal opinions, auditable custody solutions, and counterparties who won’t close our accounts.
DeFi is coming into the roadmap precisely because it is starting to look controllable, not because managers suddenly discovered yield farming.
The institutional investor base confirms the dynamics. Of allocators surveyed, 47% say evolving U.S. regulations are pushing them to increase exposure to cryptocurrencies.
Family offices and high net worth individuals remain the largest investor group for crypto hedge funds, but participation in fund-of-funds increased from 21% in 2024 to 39% in 2025.
The institutional capital of pensions, foundations and sovereign wealth funds reached 20%, up from 11%. It requires long-term capital, and DeFi must meet that standard or it will remain sidelined.
What happens when DeFi becomes infrastructure?
As DeFi moves from experiment to infrastructure, the ripple effects will shape more than just financing operations. Custody becomes programmable, with collateral moving based on code execution rather than manual instructions.
Prime brokerage splits into modular services, with one provider handling the legal wrapper, another managing on-chain execution and a third monitoring risk.
Fund administration occurs in real time: NAV calculations occur continuously, not at month end, and settlement moves from T+2 to atomic finality.
These changes favor funds that can build or integrate quickly. Smaller managers, who are already beginning to explore tokenization (37% vs. 24% of their larger peers), are gaining access to liquidity and infrastructure previously reserved for billion-dollar platforms.
Macro strategy funds show the highest DeFi holdings at 67%, attracted by the global, always-on nature of on-chain markets. The managers who move first set the standards, and those who wait inherit someone else’s architecture.
On the other hand, the risks are piling up. Transparency in the chain exposes strategies that depend on opacity. Composability introduces systemic links, as a hack in one protocol propagates through every integrated position.
Governance tokens blur the line between investments and operational control, creating regulatory ambiguity about what constitutes a security and who has the 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 US does not necessarily equate to global alignment.
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 different jurisdictions must reconcile conflicting definitions of what counts as a security, who qualifies as a custodian and when a smart contract is a regulated service.
Interoperability issues, cited by 50% of EMEA-based respondents as a barrier to tokenization, reflect this fragmentation.
Technical debt is piling up faster than institutional memory can be maintained. Most DeFi protocols are designed for pseudonymous retail users, not funds needed to perform KYC, submit SARs, and produce auditable transaction histories.
Retrofitting compliance to permissionless infrastructure is more complex than building compliant systems from scratch, but the liquidity and composability benefits of existing DeFi networks make abandoning them impractical.
The middle path, consisting of authorized forks, hybrid models and regulated front ends, does not fully satisfy anyone, but may be the only path that both regulators and allocators accept.
Investor demand remains meager in relation to institutional ambitions. Of hedge funds interested in tokenization, 41% cite the ‘lack of investor demand’ as a barrier, after legal uncertainty.
Allocators want tokenization’s promises of operational efficiency, but few are willing to be the first movers when custody standards, tax treatment, and bankruptcy protection remain uncertain.
The chicken-and-egg problem is real: managers won’t tokenize until investors demand it, and investors won’t demand until the infrastructure is proven on a large scale.
Who checks the driveway?
The DeFi roadmap is not just a story about technology adoption. The question is who determines the conditions under which traditional finance is integrated with the infrastructure in the chain.
When hedge funds build their own tokenized structures using DeFi primitives, they control issuance, governance, and fee capture.
When they rely on third-party platforms, such as centralized exchanges offering “DeFi-lite” products, or administrators wrapping permissionless protocols in permissioned interfaces, they are ceding that control in exchange for regulatory coverage and operational simplicity.
The October 10 flash crash offered a taste of the stakes. Centralized locations, which concentrate leverage and liquidity, succumbed to the successive liquidations.
Decentralized exchanges, which distribute risk across autonomous liquidity pools, absorbed the shock without system failure.
The lesson is not lost on managers who spend their careers managing tail risk. If DeFi infrastructure proves to be more robust than centralized alternatives under stress, the shift from roadmap to reality will accelerate.
If not, the three-year timeline will be extended indefinitely in the event of a major protocol exploit or governance failure that wipes out institutional capital.
The outcome depends less on technology than on coordination. Regulators must decide whether to allow hybrid models that combine on-chain execution with off-chain compliance. Custodians must build solutions that protect private keys without sacrificing programmability.
Auditors must develop standards for verifying the security of smart contracts on an institutional scale. Hedge funds, in turn, must decide whether they want to shape or consume that infrastructure.
The 43% who have put DeFi on their roadmap are betting that the answers will come in time, and that being early rather than late is the winning position.
