Logo
ScienceStack
Table of Contents
Fetching ...
Sign In

The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol

Ravi Kashyap

TL;DR

The paper addresses democratizing wealth management by engineering a Hedged Mutual Fund Protocol on blockchain that fuses mutual fund NAV updates with hedge fund-style performance fees, investor protections like high-water marks, and slippage-mitigation during redemptions. It develops a complete, implementable protocol with explicit mathematical formulations and discusses on-chain versus off-chain computation trade-offs, including aggregated versus separate position fee calculations. A key contribution is the Alpha token framework, with minting/burning tied to management and performance fees, and a formal fund-flow algorithm that operates across multiple chains to update NAV, process deposits/withdrawals, and perform rebalancing under slippage safeguards. The paper also provides numerical results illustrating different fee-structure scenarios, outlines areas for future work (overlays, ETFs, cross-chain dynamics, and derivatives), and argues that blockchain enables greater transparency, accessibility, and risk-adjusted wealth growth by combining traditional finance techniques with decentralized finance.

Abstract

We develop several innovations to bring the best practices of traditional investment funds to the blockchain landscape. Specifically, we illustrate how: 1) fund prices can be updated regularly like mutual funds; 2) performance fees can be charged like hedge funds; 3) mutually hedged blockchain investment funds can operate with investor protection schemes, such as high water marks; and 4) measures to offset trading related slippage costs when redemptions happen. Using our concepts - and blockchain technology - traditional funds can calculate performance fees in a simplified manner and alleviate several operational issues. Blockchain can solve many problems for traditional finance, while tried and tested wealth management techniques can benefit decentralization, speeding its adoption. We provide detailed steps - including mathematical formulations and instructive pointers - to implement these ideas and discuss how our designs overcome several blockchain bottlenecks, making smart contracts smarter. We provide numerical illustrations of several scenarios related to our mechanisms.

The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol

TL;DR

The paper addresses democratizing wealth management by engineering a Hedged Mutual Fund Protocol on blockchain that fuses mutual fund NAV updates with hedge fund-style performance fees, investor protections like high-water marks, and slippage-mitigation during redemptions. It develops a complete, implementable protocol with explicit mathematical formulations and discusses on-chain versus off-chain computation trade-offs, including aggregated versus separate position fee calculations. A key contribution is the Alpha token framework, with minting/burning tied to management and performance fees, and a formal fund-flow algorithm that operates across multiple chains to update NAV, process deposits/withdrawals, and perform rebalancing under slippage safeguards. The paper also provides numerical results illustrating different fee-structure scenarios, outlines areas for future work (overlays, ETFs, cross-chain dynamics, and derivatives), and argues that blockchain enables greater transparency, accessibility, and risk-adjusted wealth growth by combining traditional finance techniques with decentralized finance.

Abstract

We develop several innovations to bring the best practices of traditional investment funds to the blockchain landscape. Specifically, we illustrate how: 1) fund prices can be updated regularly like mutual funds; 2) performance fees can be charged like hedge funds; 3) mutually hedged blockchain investment funds can operate with investor protection schemes, such as high water marks; and 4) measures to offset trading related slippage costs when redemptions happen. Using our concepts - and blockchain technology - traditional funds can calculate performance fees in a simplified manner and alleviate several operational issues. Blockchain can solve many problems for traditional finance, while tried and tested wealth management techniques can benefit decentralization, speeding its adoption. We provide detailed steps - including mathematical formulations and instructive pointers - to implement these ideas and discuss how our designs overcome several blockchain bottlenecks, making smart contracts smarter. We provide numerical illustrations of several scenarios related to our mechanisms.
Paper Structure (20 sections, 10 figures)

This paper contains 20 sections, 10 figures.

Table of Contents

  1. Abstract
  2. Introduction: Mutually Hedging Decentralized Investment Platforms
  3. Blockchain Investment Funds: Challenges and Solutions
  4. Fees for Protection with Appreciation: Quid Pro Quo
  5. Outline of the Sections Arranged Inline
  6. Periodic Blockchain Fund Management Methods: Sequences of Steps
  7. Automated Performance Fee Levy Techniques
  8. Blockchain Bottlenecks and Making Smart Contracts Smarter
  9. High Water Markets During Low Market Prices
  10. Performance Fees Across Aggregated Positions
  11. Investor Level Clubbed Positions
  12. Fund Level Clubbed Positions
  13. Complete Solution Including the Scenario when NAV Falls and Rises Partially
  14. Performance Fees Across Separate Positions
  15. Periodic Blockchain Fund Management Algorithm: Fund Flow Flow Chart
  16. ...and 5 more sections

Figures (10)

  • Figure 1: Fund Flow Flow Chart: Sequences of Steps for Periodic Fund Management
  • Figure 2: Sequences of Steps for Periodic Fund Management: Input and Exogenous Variables
  • Figure 3: Sequences of Steps for Periodic Fund Management: Calculated Variables for System Monitoring
  • Figure 4: Sequences of Steps for Periodic Fund Management: Deposit and Withdraw Accept Variables
  • Figure 5: Performance Fees Illustration: Weighted Average Below High Water Mark
  • ...and 5 more figures