Investment fund managers are critical to the global economy. You are effectively handing over the management of your money to an investment professional who, in theory, has the resources and expertise to do so much better than you could. Ethereum Fund managers typically have teams of highly educated analysts that have spent many years and often significant fortunes having studied highly quantitative subjects at some of the best universities in the world. Because of the performance fee structure, we can rest easy knowing that our money is in the hands of capable, hardworking, and ambitious individuals who have our best interests in mind.

For many years, hedge funds have been romanticized and exaggerated in Hollywood and the media, making them one of the most exciting investment firms. Having the opportunity to work for a hedge fund was one of the most coveted career paths when I was in college. The hedge funds were regarded as places where highly quantitative people worked, developing innovative and complex leveraged strategies that could often yield impressive returns for the firm, its investors, and often good bonuses for the employees. ‘Hedge funds’

1.     What distinguishes hedge funds from other investments?

Complex strategies in hedge funds make them far less predictable and less trustworthy than traditional asset managers. They can short sell, trade complex derivatives, use a lot of leverage, and even take positions in obscure alternative asset classes like ethereal gold coins. In order to provide the best possible returns to their investors, they can use this freedom to develop creative strategies.

Renaissance Technologies and Bridgewater Associates are two of the most well-known hedge funds in the world. Since 1988, Renaissance’s Medallion Fund has returned an annualized return of 66%, or 39% after fees. For anyone, this is a tremendous annual return. The hedge fund industry has a number of problems that have persisted for some time despite the positive spin.

2.     Lack of openness.

There are few specifics of a hedge fund’s strategy that are available to the general public or even to the fund’s investors. Due to recent scandals like Amaranth Advisors, in which investors lost more than 60% of their money, there is a stronger demand than ever before for industry openness. Investors have no way of knowing what the management is doing with their money because of the lack of transparency. Potential investors could have some concerns about this:

The inability to detect deviations from a clearly defined plan by management. Any individual asset that the investor would wish to hedge against is impossible to determine whether the management has a substantial stake in. Unable to determine if the management is improperly utilizing derivatives or leverage. Not being able to keep track of and analyse performance and risks results in poor decision-making.

3.     Inaccessible

High-Net-Worth Individuals (HNVIs) and significant investment institutions have unique access to hedge funds. There are tight regulations that prevent retail investors from investing in hedge funds since they are believed to be incompetent in financial matters. To assume that all hedge fund investors are naive is a mistake that hinders many well-informed investors from engaging in this business.

4.     Safeguarding Your Money

Security of client funds can also be a concern, as we learned from the Bernie Madoff scandal. When you give your money to a hedge fund manager, you have no idea what he or she is doing with it. Historically, the threat of financial fraud has existed.

5.     How can there (DeFi) help?

The hedge fund sector has been in dire need of reform for some time now. However, the hedge fund structure has often withstood change despite technological advances eliminating market inefficiencies in all other sectors. A more transparent, trustworthy, and accessible investment universe is the inevitable outcome of the hedge fund industry’s natural progression. DeFi (decentralized finance) on the ethereum network has opened up a slew of new options for forward-thinking and imaginative management.

Many of the issues with the antiquated hedge fund industry can be solved by moving fund management to the Ethereum blockchain.

6. 
   

       Transparency

Management of Assets (AUM), The AUM of funds may be observed on the blockchain by placing assets on-chain. This makes it very difficult to falsify AUM to new prospective investors and to misreport AUM on the paperwork. All of the fund’s assets may be seen by all investors on the blockchain.

Exposures and dangers that exist right now On-chain positions taken by the fund are also visible. Investors will be able to examine the fund’s current risk profile and hold it accountable if it deviates from the agreed-upon plan for which it was first established. Investors should have significantly more faith in a new manager who is open and transparent than those who are concerned that rivals may attempt to copy their tactics by looking at their transactions on-chain.

A track record that can be independently verified provides investors with the information they need to make an educated investment choice. Over time, a verifiable and immutable track record is built upon the blockchain that cannot be tampered with.

7.     How does this work?

New fund managers on-chain receive their assets in a secure smart contract vault and issue ERC20 tokens that are related to the Net Asset Value (NAV) of their unique fund. The money invested in ERC20 tokens is returned to the investor in the form of the same number of ERC20 tokens. These ERC20 tokens may be freely exchanged with other investors and traders on any decentralized platform or directly. The value of these tokens, which the investor keeps in their wallets, fluctuates over time in accordance with the value of their investment in the fund. A smart contract vault also prevents the fund management from seeing the underlying assets.

Investing in funds on-chain provides an additional layer of protection since the manager will be unable to conceal any mismanagement of your invested money. Because he or she does not have access to the invested monies, there is very little possibility of him or her making off with the whole amount. The liquid assets that constitute the investor’s investment in the fund are constantly kept on hand by the investor. With the management of the fund, once again, there is less need for trust.

 

Disclaimer: This content does not necessarily represent the views of IWB.