Tokenized Hedge Funds: What Are They & Why You Should Care
Blockchain technology is a disruptive force in the world of finance. First, it allowed people to transfer money across the globe in minutes at a fraction of traditional costs. Then, it gave entrepreneurs an easy way to raise capital with Initial Coin Offerings (ICOs). And now, it is unlocking profitable investments for a broader public through tokenization.
Tokenization refers to the process of turning assets into digital tokens that can be transferred, stored, or managed on a blockchain. This process works for virtually any asset out there.
If you are the owner of a famous painting and need money fast, you would typically have to sell the art to access it. But finding a buyer willing to pay the price can take some time. Tokenization gives you another option. You could digitize the value of the painting and allow people to purchase it in smaller portions. As you’re (digitally) breaking up the canvas into small pieces, it would be much faster to raise the required capital.
The same logic applies to hedge funds which require a sizable minimum investment to participate. Tokenization has the power to instantly lower the entry barrier to hedge funds, giving a vast number of investors access to profitable and well-diversified investment vehicles.
The Case For A Tokenized Hedge Fund
Whether you only have a few thousand dollars to invest or control a multi-billion fortune, at the end of the day, the goal is the same: making money. But despite sharing a common goal, it is the size of your pockets, which largely conditions the investment tools available to you. At least, that’s the case in the traditional investment landscape.
If you have a small amount of capital to invest, you could either distribute it in bonds, stocks, ETFs, or mutual funds. Does that sound limited? Of course not. Those investment vehicles are good and you can build wealth. Yet, they are light years from the rates of return and levels of diversification enabled by venture capital, private equity, and hedge funds — tools only accessible by those with significant capital.
The boom of Initial Coin Offerings (ICOs) in 2017 sent a clear message to the investment community: ordinary people want a seat at the big boy’s table.
Blockchain-based crowdfunding raised nearly $10 billion in 2017 alone, with a 13% growth seen the year after. However, the increasing number of projects failing to deliver promises combined with sharp declines in the cryptocurrency market sentenced many ICOs to a quick death.
The ICO era opened the doors to other forms of tokenized investments. Among them, Security Token Offerings (STOs) — fully regulated token offerings.
Unlike ICOs, in which investors receive utility tokens, STOs distribute digital tokens that fall under the status of securities. In other words, tokens linked to underlying investment assets like bonds, stocks, and yes, hedge funds too.
A hedge fund is a private investment vehicle that pools capital from accredited investors and implements a variety of strategies to offer high returns.
One of the most attractive characteristics of hedge funds is the wide latitude of investments covered. Hedge funds can invest in almost anything from currencies to real estate to stocks. Their ability to go short on positions is also a distinctive aspect of these funds.
While hedge funds might seem like a very attractive investment opportunity, they are inaccessible for the vast majority of investors. Even if you’re an accredited investor, not everyone has $1,000,000 to invest. And that’s just the average minimum. This said, it’s precisely in this area where tokenization presents enormous potential.
Through a security token, small and medium-sized accredited investors may benefit from the well-balanced, diversified, and profitable portfolio designed by professional hedge fund managers.
For hedge funds, tokenization also comes with significant advantages. The full transparency of a blockchain-based system increases trust among investors, which could translate into more sizable investments. But most importantly, it is the concept of fractional ownership which could pour massive capital into hedge funds.
Key Benefits Of A Tokenized Hedge Fund
A compliant token economy could significantly increase the efficiency and fairness in the financial world, reducing unnecessary friction in the access to investment vehicles for a broader public. Here are some benefits of a tokenized hedge fund:
1. More transparency
Blockchain technology offers a unique level of transparency for hedge funds. The rights of investors, legal responsibilities and limitations, and record of ownership are all embedded directly onto the security tokens.
2. More liquidity
Tokenized assets are exchanged on secondary markets, which increases liquidity and, consequently, the freedom for investors to “move” their capital.
3. More efficiency
Technological advancements along with the decentralized nature of cryptocurrencies and the underlying blockchain tech that powers them, means that data, trust, approvals and transactions happen faster, sometimes instantly. This translates not only into quicker movement of funds, but also cheaper. Faster cheaper operation means lower fees for everyone involved.
4. More investors
Security tokens could bring hedge funds to a broad audience. Reduced minimum investment and less hurdles to take part in a fund would make an appealing and viable choice for the small investor. Also, the ability to exchange the security tokens on secondary markets give investors additional peace of mind.
Why should you care?
Whether you are an individual investor or a hedge fund manager, it’s important to understand and consider tokenized securities because it is happening. It is happening right now and the landscape will soon look different. Tokenization creates a more efficient, democratic, and extensive financial environment. One that can soon become available to millions of investors through Security Token Offerings (STOs).
The challenges ahead are mainly focused on the regulatory side, but this also presents significant long term opportunity for security tokens. The projects that navigate and overcome these obstacles will benefit from a leading market position in the STO space.
Hedge fund investing is on the verge of accessibility to a broader audience of investors. With STOs breaking down high-yielding professionally-designed investments into affordable tokens, the only question left is: where do you stand?
