The scale of cryptocurrency ETFs has reached 111 billion USD, but actively managed funds struggle to grow: why are institutional funds not buying Alpha?

Author: Kim Lim, Jasper Jin, Binance Research

Compiled by: Deep Tide TechFlow

Deep Tide Overview: The scale of Bitcoin and Ethereum spot ETFs in the United States has reached $111 billion, with institutional funds entering the market in large numbers. However, compared to the explosion of passive tools, the average size of active crypto hedge funds is only $132 million, with 91% below $1 billion, creating a stark contrast between the two.

Binance Research, in conjunction with Capital Connect, points out based on data up to the end of October and frontline interviews that the core obstacle to the expansion of active strategies is not the research and investment capabilities, but rather the lack of institutional-level distribution layers and reliable data verification. Even with a 7.2% drop in BTC in October, asset safety and risk control remain key to driving allocations.

Key Summary

• On the Capital Connect platform, the number of neutral strategy funds accounts for less than half but attracts 92.1% of platform funds; directional strategy funds account for 44.3% of the number but only 6.7% of assets under management (AUM).
• The average single investment amount for neutral strategies on Capital Connect is about 11 times that of directional strategies, reflecting a higher certainty among fund allocators when increasing their investments.
• In October, Bitcoin dropped 7.2%, yet directional funds still recorded an average positive return of +1.9% for the month, and the number of investors rebounded to 52, the level seen in May.
• All interviewed fund allocators indicated that verified internal exchange data could significantly enhance due diligence; 80% of respondents prioritized asset safety.

Institutional funds have entered the crypto market, but active management strategies have yet to scale. The entire industry has built extremely well-developed channels for passive exposure, but the infrastructure for discovering, verifying, and benchmarking active fund managers is almost nonexistent.

The reason institutional funds remain in Beta exposure for a long time is not due to active choice, but rather because the market lacks an effective distribution layer. Capital Connect, a regulated crypto fund discovery and allocation platform under Binance, was established to fill this gap.

This update extends the analytical perspective to a snapshot of platform data as of October 31, 2026, and includes direct interviews with platform fund allocators and fund managers for the first time. The core conclusion remains valid even in a market where Bitcoin has dropped 7% in a single month: hedge strategies continue to dominate, Bitcoin-denominated orders still contribute the largest single investment amounts, while directional funds are waiting for clear recovery signals.

Allocators and managers agree that what truly drives fund allocation is not the yield itself, but verifiability.

The Crypto Market Has Achieved Beta Scaling but Is Stuck in Active Management

The willingness of institutions to allocate to digital assets is now quite solid. According to a joint survey by EY-Parthenon and Coinbase in 2026, 73% of institutions plan to increase their allocation to digital assets this year. A report by AIMA and PwC shows that 55% of traditional hedge funds currently hold crypto assets, up from 47% in 2024.

However, most of this demand has flowed into passive investment vehicles. Among the surveyed institutions, 81% prefer to gain spot exposure through registered compliant products. As of the end of October 2026, the combined asset scale of Bitcoin and Ethereum spot ETFs in the United States is approximately $111 billion; in contrast, the average asset management scale of crypto hedge funds is only $132 million, with 91% of funds below $1 billion.

We believe this divergence reflects a gap in market infrastructure rather than a lack of manager capability. The rapid growth of ETFs is due to their provision of a complete set of institutional-grade packaging solutions: including custody, auditing, daily net asset value estimation, and reporting systems familiar to institutions. In contrast, active crypto strategies have yet to provide an equivalent level of institutional integration capability.

This cautious attitude is also reflected in position sizes. Among traditional hedge funds holding crypto assets, more than half have allocation ratios below 2% of total assets; meanwhile, 60% of institutions plan to increase their exposure to above 2% within a year. This indicates that the constraint on allocation is not a lack of interest, but rather the limitations of existing investment infrastructure.

Figure: Institutional allocation willingness is high, but passive tools have absorbed the vast majority of fund inflows (Data Source: EY-Parthenon and Coinbase 2026 March Institutional Investor Digital Asset Survey, AIMA and PwC 2025 Global Crypto Hedge Fund Report, State Street Bank 2025 October Digital Asset Survey, SoSoValue, Binance Research, as of October 31, 2026)

The Missing Middle Layer: Excellent Managers Are Not Lacking, but Hard to Discover

If the bottleneck in the industry is a lack of talent, market forces will naturally resolve it. However, the reality is different; the real bottleneck lies in "discovery" and "verification."

Traditional financial markets are institutionalizing the path for funds to find managers. AIMA and Marex's research shows that the reliance on personal networks by fund allocators has decreased from 65% in 2024 to 40% in 2026, while the proportion of capital introduced through prime broker channels has increased from 22% to 30% during the same period.

The crypto industry seems to still lack equivalent standardized channels. Fund allocation remains highly dependent on Telegram groups, offline summits, and referrals from acquaintances. Due to the absence of a unified performance disclosure and benchmarking framework, investors cannot horizontally compare different managers on the same dimensions; institutions also find it difficult to verify the audited financial statements, custody arrangements, and service provider qualifications they currently require.

These frictions constrain both supply and demand sides. Among crypto hedge funds, 47% report that investor demand is rising, while this figure is only 29% among traditional hedge funds involved in crypto assets.

Nevertheless, family offices and high-net-worth individuals remain the main funding sources for crypto funds. Only one-fifth of crypto hedge funds list pensions, foundations, or sovereign wealth funds as their primary investor types, although this proportion has increased from one-ninth a year ago.

Figure: Fund allocators are gradually standardizing the channels for discovering managers, while the demand for crypto funds is growing faster than that for traditional hedge funds (Data Source: AIMA and Marex 2026 Emerging Managers Survey, AIMA and PwC 2025 Global Crypto Hedge Fund Report, Binance Research, as of October 31, 2026)

In Terms of Quantity, Directional Strategies Are More Numerous, but Neutral Strategies Dominate in Fund Size

Once the market has a transparent discovery layer, the true preferences of fund allocators become easier to reveal. Capital Connect serves as such an observation window, where strategies on the platform must be publicly disclosed, and performance is measured against a unified standard. The data from October continues the previous allocation pattern.

In terms of the number of funds, directional strategies remain the largest group, accounting for 44.3%, but only attracting 6.7% of platform funds. Market-neutral, statistical arbitrage, and traditional financial style multi-strategy funds collectively hold 92.1% of the assets under management, with multi-strategy funds alone accounting for 14.3%.

Additionally, the average single investment amount for neutral strategies is about 11 times that of directional strategies. This indicates that the flow of platform funds reflects the true preferences of allocators, rather than being determined solely by the number of funds.

Recent trends also confirm this judgment. The investor participation in market-neutral strategies has risen for two consecutive months, with a cumulative increase of 30% since May; the number of participants in statistical arbitrage strategies has more than doubled during the same period and remained stable throughout October.

The product supply from managers and the actual demand from funders are pointing in opposite directions: a large number of long-tail managers tend to launch directional products, while institutional funds are highly concentrated in hedge strategies. The discovery layer itself does not create this preference; it merely makes it explicit.

Figure: Directional strategies lead in the number of funds, while neutral strategies dominate in fund size (AUM) (Data Source: Capital Connect, Binance Research, as of October 31, 2026)

Two Core Delegation Models, Both Tested by the Market

Two mainstream allocation delegation models are growing simultaneously, and the market fluctuations in October have tested their different performances under pressure.

The first is the crypto-native model. Nearly half of the funds on the platform (48.7%) are concentrated in funds priced in BTC, ETH, or BNB. These funds attract about one-fifth of investors, but their average single investment amount is about 3.5 times that of stablecoin funds.

Allocators retain exposure to the underlying assets while outsourcing hedging operations to professional teams. During October, Bitcoin-denominated physical holdings remained stable, with AUM in USD adjusting mainly following BTC price fluctuations.

The second is the convergent model. Traditional financial style multi-strategy funds are currently the third largest strategy by fund size, accounting for 14.3%. However, in October, the number of investors participating in this strategy fell by 14% month-on-month, from 21 to 18.

Overall, this phenomenon reflects a maturation of the market rather than a reversal of trends. Once the industry provides product structures that align with traditional financial habits, institutions will naturally accept them; however, allocators still maintain cautious selection, and even if the strategy itself shows stable returns, some investors still choose to withdraw temporarily.

Image: The average single purchase scale of coin-based pricing funds is the largest (about 3.5 times that of stablecoin funds, source: Capital Connect, Binance Research, as of October 31, 2026)

Risk Appetite Rebounds and Withstands the Test in October

The capital participation in directional strategies is gradually recovering. As yields bottomed out in June, the number of investors in the sample pool significantly declined, dropping to a low of 36 in July; it then gradually rebounded, reaching 52 by October, returning to May levels. The average return of directional funds since inception has also improved from -11% in June to +3.7% in October.

The market conditions in October served as the first real test of this round of recovery. During the month, BTC fell by 7.2%, but directional funds still recorded an average monthly positive return of +1.9%, while the average return for market-neutral funds was +1.0%. Our interview results also showed a consistent behavioral pattern: capital providers typically reduce directional exposure during market pullbacks and re-enter once volatility and liquidity stabilize.

However, directional investments remain challenging. The return disparity between the best and worst performing funds is about eight times that of neutral strategies; the median return is around +4%, with only 55% of funds achieving positive returns. In contrast, nine out of ten neutral strategy funds recorded positive returns.

Nevertheless, the top quartile of directional funds has achieved an average return of +69% since inception. Capital providers clearly stated that as long as they can deliver this level of Alpha with manageable drawdowns, they are still willing to pay for it.

Image: As performance recovers, the number of investors in directional strategies gradually increases and remains stable during the October market (source: Capital Connect (strategy returns are the simple average of fund net values), Binance (BTC/USDT), Binance Research, as of October 31, 2026)

Image: The return distribution of directional strategies spans much wider than that of neutral strategies (source: Capital Connect (excluding dormant funds and funds with management scales below $1000; neutral strategies cover market-neutral, statistical arbitrage, and traditional multi-strategy), Binance Research, as of October 31, 2026)

Frontline Feedback from Capital Providers and Fund Managers

To verify the deeper logic reflected behind the data, we directly interviewed capital providers on the Capital Connect platform and the trading teams responsible for operating the funds. Their responses clearly explained the causes of the aforementioned market landscape.

For capital providers, asset safety ranks absolutely first, with 80% of respondents placing it above historical performance and institutional reputation. Respondents also pointed out that verified real data from exchanges can significantly enhance the credibility of due diligence, and when evaluating managers, they place more importance on drawdown control capabilities rather than purely high returns on paper.

For fund managers, the real fundraising barrier is not the lack of impressive yields, but rather the cost of trust. Past performance is difficult to cross-verify, compounded by issues such as KYC, anti-money laundering (AML), and counterparty compliance reviews, which severely slow down the fundraising pace, causing the vast majority of funds to rely solely on recommendations from acquaintances.

However, after being listed on the platform, some managers have been able to reach a broader group of investors, compliant institutions, and pools formed by small amounts of capital.

The signals conveyed by both market supply and demand sides are highly consistent: verifiability opens the door to trust, while a sound operational infrastructure can further widen this pathway.

Image: Capital providers prioritize asset safety and data verifiability over historical performance (source: Interviews with capital providers and fund managers on Capital Connect (October 29 to November 1, 2026), Binance Research, as of November 1, 2026)

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