The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol

Abstract

We develop several innovations designed to bring the best practices of traditional investment funds to the blockchain landscape. Our innovations combine the superior mechanisms of mutual funds and hedge funds. Specifically, we illustrate how fund prices can be updated regularly like mutual funds and performance fees can be charged like hedge funds. We show how mutually hedged blockchain investment funds can operate with investor protection schemes - high water marks - and measures to offset trading slippage when redemptions happen. We provide detailed steps - including mathematical formulations and instructive pointers - to implement these ideas as blockchain smart contracts. We discuss how our designs overcome several blockchain bottlenecks and how we can make smart contracts smarter. We provide numerical illustrations of several scenarios related to the mechanisms we have tailored for blockchain implementation. The concepts we have developed for blockchain implementation can also be useful in traditional financial funds to calculate performance fees in a simplified manner. We highlight two main issues with the operation of mutual funds and hedge funds and show how blockchain technology can alleviate those concerns. The ideas developed here illustrate on one hand, how blockchain can solve many issues faced by the traditional world and on the other hand, how many innovations from traditional finance can benefit decentralized finance and speed its adoption. This becomes an example of symbiosis between decentralized and traditional finance - bringing these two realms closer and breaking down barriers between such artificial distinctions - wherein the future will be about providing better risk adjusted wealth appreciation opportunities to end customers through secure, reliable, accessible and transparent services - without getting too caught up about how such services are being rendered.