Hedge funds being a private investment class wield complete control over the choice of investors i.e. selecting those investors who may invest and those who may not. This is where enzyme finance and DeFi Hedge Funds come in to allow decentralized assimilation of the project allowing higher accessibility to this investment opportunity.
Hedge funds are an alternative investment model that uses pooled funds that apply various strategies to ensure a high return for investors. These funds typically face fewer regulations as compared to other investment classes. However, these funds are not accessible to average investors but are generally accessible to accredited investors.
Starting a hedge fund is by no means an easy feat. This is because the initial investment required to join in lies in the range of $100k -$1m. These funds have shown exceptional growth in the past few years and have not escaped their share of controversies.
Hedge funds being a private investment class wield complete control over the choice of investors i.e. selecting those investors who may invest and those who may not.
This is where DeFi Hedge Funds come in to allow decentralized assimilation of the project allowing higher accessibility to this investment opportunity.
The Enzyme Finance Melon protocol is a set of smart contracts riding on the Ethereum blockchain. A Melon fund is a set of contracts that emulate the behavior of an investment fund. This protocol allows users to create, manage and invest in custom crypto asset management vehicles.
This protocol aims at decentralizing traditional asset management that has historically been restricted domain controlled by professional financial advisors and firms.
The objective behind MLN cryptocurrency or Enzyme Finance is to lower the barriers to allow mass entry for asset management. This should opening access for more global consumers.
For clarity, we take an example of managed funds which generally require a minimum investment amount plus a management fee. This can veritably put these wealth tools beyond reach for average consumers. Adding to this is a significant capital and legal consultation and finishing off with the years taken to file documents for the funds.
Enzyme finance works to build an alternative system – the DeFi Hedge Fund. In this system, the project’s web portal may be accessed by users to invest in funds and portfolios launched by other users at the same time allowing the rest to invest in theirs. Enzyme Finance uses MLN cryptocurrency to process the work on the platform.
The idea of hedge funds has traditionally been to take greater risks in order to gain a high return on investments. Traditional hedge funds reserve the right to operate as per their designs as long as they disclose their approach upfront to their investors. As mentioned before, Hedge funds are private investment entities that do not require public disclosure of their approach of investment. This implies, they lack transparency.
In contrast, blockchain technology is a natively immutable, distributed ledger that allows a view of every transaction assuring complete transparency in operation. This higher transparency attracts newer investors to trust the system.
Traditional Hedge funds operate on a fee structure that demands investors pay a 2% in management fee(for operations of the fund) and another 20% to the fund manager. DeFi platform eliminates this requirement and also removes the involvement of a third party.
The DeFi system eliminates the high-risk factor associated with Hedge Fund investments and also removes heavy operational and administrative costs to implement decentralized asset management.
Also Read: Game-Changing DeFi Trends For 2021
Enzyme Finance limits the fund set-up cost to a few hundred dollars and winds up the process within a few minutes. Blockchain being inherently immutable and transparent, requires no complicated and expensive audits. Investors retain complete custody of their assets and redeem those without intermediary reliance.
In contrast to traditional Hedge funds wherein the transaction could take weeks, Enzyme ensures the transactions happen instantly eliminating the need for settlement service. Enzyme automates most back-office functions and intermediary work thereby eliminating the operational expenses of managing the fund.
The successful run of DeFi Hedge funds would certainly make it available as a potent investment opportunity to average investors. The application of blockchain would serve to make it transparent and do away with the controversial tags that come attached to traditional Hedge funds. While the risks coming with the investments are not as high as with the traditional system, the returns on investment may also not get quite high. On the same note, losses should remain within limits.