Managing Traditional Hedge Funds with Ethereum

Rage Comment : Hedge funds are investment funds with relatively low risks and high returns. However, the entry threshold is too high, resulting in only investors with sufficient wealth accumulation being able to participate, which is unfair to many people. However, if blockchain technology is used, the threshold can be greatly lowered, allowing ordinary investors to participate. For example, the Ethereum-based hedge fund platform Swiss Melonport aims to use Ethereum smart contracts to automate the most costly hedge fund processes.

Translation: Annie_Xu

In the world of hedge funds, the old saying really holds true: You have to have money to make money.

The barrier to entry is typically $500,000 for individual investors and $200 million for portfolio managers. But the potential rewards are just as huge.

Mona El Isa, a former Goldman Sachs vice president, learned this the hard way. After being named to Forbes’ 30 Under 30 list and raising $30 million for her own fund, she found herself unexpectedly ill-prepared to compete with better-capitalized companies.

Frustrated by a competitive environment that favored only those who already had enormous wealth, El Isa stopped running her fund and began learning about blockchain, a technology she believed could lower barriers to entry and reduce regulatory burdens, thereby making the competitive environment for hedge funds more level.

Now the Ethereum-based hedge fund platform she founded has announced the hiring of George Hallam, formerly head of external communications at the Ethereum Foundation, to bridge the gap between hedge fund needs and blockchain technology.

El Isa said:

“For someone willing to rebuild the space from scratch, I think the really interesting properties that blockchain can apply to asset management are not just about automation, but about execution.”

Lowering the barrier to entry

Founded in February 2016 and officially launched in August, Switzerland-based Melonport is a series of Ethereum-based smart contracts designed to automate the most costly hedge fund projects.

El Isa and her co-founder, mathematician and Solidity contributor Reto Trinkler, already have a third hire, Hallam, who will be in charge of business development for Melonport.

Designed to cater to aspiring hedge fund managers as well as those looking to cut costs, the Melonport protocol consists of two sets of Ethereum-based smart contracts — Melon Core and Melon Modules — that contain self-executing code that can perform tasks that were traditionally performed by humans.

While Melon Core is designed to enable portfolio managers to develop services that are compliant with the underlying codebase, Melon Modules have portfolio matching functionality, including price feeds, volatility calculations, and daily profit and loss calculations, which can be applied to any hedge fund investment philosophy.

In summary, the two elements of the protocol are designed to help managers easily set up hedge funds, with pre-set, immutable investment parameters embedded in smart contracts to ensure promises are kept and leave an auditable record of the fund’s success to help attract future investors and simplify regulatory compliance.

"The idea is to get people's attention before they set up a fund and say: you don't actually have to worry too much about the software."

If successful, the hedge fund platform could significantly lower the barrier to entry for underfunded fund managers, providing them with an opportunity to test new models.

Benefits of blockchain

Thus, in theory, new market participants could reduce the minimum threshold from hundreds of thousands of dollars to a fraction of the value of ether, or any number of future currencies that can run on blockchains.

Melonport is part of a young but fast-growing group of asset management platforms currently pursuing similar blockchain-based solutions.

But there is still a lot of market share to compete for.

According to the most recent Preqin Global Hedge Fund Report, total assets in the hedge fund industry were $3.2 trillion in 2015, excluding hedge funds that could not be established because the barriers to entry were too high or the asset class was too new.

We know of about 10 different companies vying for share of existing markets and markets that don't yet exist.

Newly launched diversified blockchain portfolio CoinFund has provided a document listing 11 decentralized asset management platforms (DAMPs), two of which have ceased operations and seven in the testing preparation stage, including Melonport, Iconomi, and Iterative Instinct (i2).

At the heart of these services is the new value proposition that blockchain brings to existing hedge fund strategies.

“By using smart contracts, investors looking to start a hedge fund can do so more efficiently, faster and with greater transparency,” El Isa said.

Token Sale

Melonport has plans to raise additional funds through a token sale in mid-February.

In preparation for the event, Melonport has been working with nine partners to test its smart contracts.

Current partners include CoinFund, Satoshi Fund, Technologies Capital and Privatemarket.io. “We are in discussions with more partners.”

Advisors to the project are Andreas Glarner, who is working with Swiss law firm MME to explore new avenues for ICO legal compliance, as well as blockchain venture capitalist Jehan Chu and Gavin Wood, co-founder of Ethereum and founder of Ethcore.

Melonport is expected to launch later this year, with investment opportunities limited to digital assets denominated in ether and hosted directly on the blockchain, a decision that will likely simplify regulatory requirements.

On Feb. 15, the startup will begin selling tokens, called MLNs, to investors and companies that want to use its hedge fund services.

A total of 1.25 million tokens will be issued in two batches, with the second batch expected to be released later this year.

After the platform is launched, additional tokens will be issued from time to time to incentivize the construction and maintenance of open source modules.

Melonport is one of many innovative investment vehicles that cannot market their products to U.S. investors due to regulatory issues.

In addition to Ethereum

At the heart of Melonport’s business model is an idea similar to the “Internet of blockchains” from advisor Gavin Wood’s Polkadot project, which has also been helped by Melonport co-founder Reto Trinkler.

The end result could be the creation of a set of investment vehicles based on strategies managed by hedge funds, such as high-speed trading on enterprise-grade Ethereum and long-term investments with longer settlement times completed via blockchain.

By August 2017, Melonport expects to have completed version 1.0 of its protocol and completed the first audit of its code.

Additional audits are planned for 2018, with version 1.0 of the management model implemented and finalized in February 2019.

El Isa said:

“We have just completed our second prototype and are preparing to start a round of safety audits from the end of February.”