Is it a known issue. No. There is a feature request to add this ability but the connectors are working as designed
Is there a patch to enable this. No
move to a VM. No
work around. No
Short answer you need to have a service principle in order to connect to azure based resources in the currently releases.
Will Moving to EDQ on Azure resolve this issue?
EDQ? are you referring to data engineering quality (DEQ) or cloud data quality (CDQ).
Either way, the DQ or DI products currently do not have the ability to use managed id's with o-auth. Everything uses the service principle approach.