Through a case-study of Arabuko-Sokoke forest, this paper investigates the potentials and limitations of participatory forest management (PFM) and forest-based income generating activities (IGAs) as conservation strategies. Based on household surveys, individual interviews, and forest transects, the paper shows how formal and especially informal institutions establish incentive structures that undermine the conservation and livelihood objectives of PFM and IGAs. PFM has reproduced, rather than reduced, on-site state control and local elite capture. As an IGA, butterfly farming has some small-scale economic potential but questionable effect on forest conservation. However, official and hidden institutions largely prevent the current manifestations of PFM and butterfly farming from influencing actual forest uses, i.e. who extracts what products, in which quantities, why, and how? Hence, continued support to PFM should focus on exposing and challenging overt but not least hidden institutions to improve the chances for a positive impact on local livelihoods and forest conservation. Further, since sustainable forest utilisation through PFM and IGAs is unlikely to generate enough benefits to make forest conservation attractive to those who can legitimately and effectively regulate access, some form of carefully designed payment for nature conservation seems the only realistic way to conserve Arabuko-Sokoke forest.