Decentralized Hedge Funds
Blockchain, cryptocurrency, trading, mining. In the company of these buzz words, one more thing recently appeared – hedge funds. The term that previously existed only in the financial market environment is now associated with high technology. There are engineers who build, manage and scale something called “hedge funds.” Many recommend them as the best way to invest in cryptoactives. However, for everyone else, the question remains “what are hedge funds and how to choose the best ones?” Let’s understand.
Things first – what is a hedge fund anyhow?
This is an investment tool. Without going into legal details, a hedge fund can be considered a pool of assets in various proportions that are managed by specialists – fund managers. A typical hedge fund in the securities market manages various stocks for several companies that make up a common pool. Since the pool contains different stocks and none of the assets dominates the others, the risk is reduced. In other words, the risk is limited, hence the name.
Are all hedge funds the same?
Most of the work of all successful hedge funds is based on unique market information available to fund managers. Thus, they can realize a market opportunity that no one knew about before. At the same time, the hedge fund may attract investors who will put their money earned in blood and then money at the disposal of managers.
The differences between the two hedge funds can be reduced to the unique data that each of them uses, and the decision-making process within the fund.
Are there different decision making principles?
Each specialist makes certain decisions, and depending on them, the value of the fund will increase or decrease. The financial incentive for these specialists (or fund managers) is directly proportional to the fund’s earnings. A manager who makes the right decisions time after time earns more than he regularly makes mistakes. This is the traditional way of making decisions in a hedge fund. On average, 200-250 managers who manage the fund and investors’ money work in one hedge fund.
The success of the foundation will be determined by the results of the work of these 200 people. However, intelligent people among us began to ask themselves: “Are 200 people enough? Will the fund work more successfully if this number is increased? ”The decentralized principle of decision-making was the answer to these questions.
How does decentralized decision making work?
The decentralization fashion has not passed hedge funds. The blockchain has taught us that if there is a protocol or method of organizing a large number of unfamiliar people with decent incentives leading to behavior that is good for this community, it makes no sense to limit the number of participants.
It looks so easy. Is this really true?
The basic economic principles are really simple. However, the devil is in the details. Like traditional hedge funds that operate on the basis of unique information, decentralized protocols must also use a unique opportunity that would be difficult for someone else to repeat.
Interesting examples include the Numerai funds, the protocol of which organizes data specialists, and God Token, whose decentralized protocol is used to organize thousands of miners. This is the principle of the decentralized hedge fund, although in the real world it can be much more difficult to use these protocols. In addition to technology, at every stage of the operation of such a protocol, the economy controls everything.