The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol

TL;DR

This paper introduces innovative blockchain-based mechanisms for wealth management, enabling traditional fund practices like performance fees and investor protections to be implemented securely and efficiently on the blockchain.

Contribution

It presents new methods to adapt traditional investment fund features such as fee calculation and investor protections to blockchain technology, enhancing decentralization and operational efficiency.

Findings

Blockchain can simplify performance fee calculations.

Operational issues in traditional funds can be alleviated using blockchain.

Numerical illustrations demonstrate the effectiveness of proposed mechanisms.

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.