Creating High Performance LP Vaults

Alpha Vaults users are creating their own LP vaults to achieve monthly returns up to 37% (373% APY), with NO token incentives.

• This article was originally published by Charm on 30th August 2022 at Mirror. It is reproduced here for Charm’s readers on Medium.

Introduction

Alpha Vaults v2 was launched over a month ago, and users are already creating their own high-performing LP vaults. This article provides an overview of the highest performing vaults, and what we can learn from them.

The vaults

Since launching on 13th July, Alpha Vaults users have created vaults for 20 Uniswap pools. For the vaults that have been actively used, the following are the best performing:

• FUMO / WETH (Mainnet)
• WETH / SNX (OP)
• WETH / OP (OP)
• WETH / TOSHI (BASE)

Compared to HODL, these vaults achieved monthly returns between 2.6% to 37% (24% to 373.9% APY), with NO token incentives.

These high performing vaults share many similarities:

1. They rebalanced closer to a 50:50 token ratio.
2. They had periods of losses before outsized returns.
3. The pool prices stayed within the base range.
4. The pool prices moved within the limit range.
5. The rebalances are fully automated.

The following provides further details.

50:50 rebalance

All vaults outperformed when rebalance is triggered closer to a 50:50 token ratio.

For the FUMO/WETH vault, rebalancing when the token ratio is closer to 50:50 increased performance by 15%

A possible reason is because a 50:50 token ratio have the lowest Impermanent Loss (IL), as it is the same state as a Uniswap V2 or Full-Range position. In this state, the vault is able to earn fees income from concentrated liquidity at the lowest IL.

Losses before outsized returns

The vaults all had periods of losses before outsized returns. For example:

The WETH / SNX vault underperformed HODL and the Benchmark in the beginning, before outperforming both after 1 month.

A possible reason is because Alpha Vaults’ mechanism deposits more liquidity into an increasingly risky and high yielding position if the price do not consolidate, so that if it does consolidate, there will be outsized gains.

Range bound trading

The more Range-Bound trading there is within the base range, the higher the return. For example:

Range bound trading within the base range for the WETH / OP vault led to consistent outperformance.

This is because the main role of the Base Order is to collect fees, and the vault will collect more fees if more trading takes place within the ranges (‘Base Range’) chosen by the base order. Liquidity managers should therefore have a view of how the price will move, so that they can set a Base Order to allow Range-Bound trading to take place within the Base Range.

If liquidity managers are concerned the prices will never trade within a range (eg in a trending market), they should consider taking out a hedge (eg using options).

Consolidation into the limit range

Better performance is more likely if the price moves into the Limit Range:

For the WETH / TOSHI vault, the vault outperformed after the price (89,240,000) moved within the limit range (ie 30,070,000 to 95,930,000) set before the price move.

This is because the vault collected yields from an extra in-range LP position.

Automating rebalances

Passively managing the vault using automated rebalances appears to have the most consistent out-performance:

For the WETH / SNX vault, automatically rebalancing once every 48 hours achieves consistent out-performance.

But actively managing the vault using manual rebalancing appears to have the highest performance:

For the FUMO / WETH vault, manual rebalancing achieves the highest performance.

Summary

From the vaults created to date, the following can be learned from Alpha Vaults users:

1. Whenever possible, rebalance closer to 50:50 token ratio.
2. Deposit into the vault during period of losses.
3. Regularly update the Base Order to capture range bound trading, and consider taking out a hedge (eg options) if range bound trading is unlikely.
4. Regularly update the Limit Order to capture consolidation.
5. Automating rebalance is a good approach if users do not want to actively managed their vaults.

The above summarises Charm’s learnings to date, and further best practices will emerge as more users use Alpha Vaults to manage their own liquidity.

Charm is looking forward to learning more from its users.

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Disclaimer

The content of this post is provided for informational purposes only. Nothing herein constitutes investment, legal, or tax advice or recommendations. Nothing on this site should not be relied upon as a basis for making an investment decision. It should not be assumed that any investment in the asset class described herein will be profitable and there can be no assurance that future events and market factors would lead to results similar to any historical results described.