This article presents the evaluation of water-soluble palladium nanoparticles with hydrophobic active sites that are ideal for the biphasic colloidal catalysis of water-insoluble organic substrates in aqueous solution. Palladium nanoparticles stabilized with ω-carboxylate-functionalized alkanethiolate are first synthesized using ω-carboxylate-S-alkylthiosulfate as their ligand precursor. The biphasic catalysis is carried out for the reaction of hydrophobic allylic alcohols without using any additional mixing solvent or surfactant, which results in the complete consumption of substrates under the atmospheric pressure of H2 gas and at room temperature in less than 24 h. Systematic investigations on the influence of pH and substrate size are also performed to examine the utility of these thiolate-capped palladium nanoparticles as structurally stable and water-soluble micellar catalysts for the biphasic reaction.