Global asset management giant Fidelity provides hosting services, which may be the world's first bitcoin derivatives fund
Given that major exchanges make crypto asset derivatives transactions more acceptable to investors, an asset management company wants to try out funds based on bitcoin options.
Los Angeles-based Wave Financial launched the Wave BTC Income & Growth Digital Fund, which claims it is the first revenue fund on the market based on crypto asset derivatives.
"I think the lack of crypto-asset markets is a lot of very reliable traditional types of products, but these are crypto assets," Ben Tsai, managing partner at Wave Financial, told CoinDesk.
After months of due diligence, Tsai said that Fidelity Digital Assets, the world's largest asset management company, Fidelity, has begun offering crypto asset hosting services for the fund.
The idea is to take advantage of the creativity of traditional funds and the growth of crypto-derivative platforms that underpin these new fund technologies, and to take part in new markets for revenue-generating products in the crypto-asset sector.
The Wave fund plans to earn monthly income by selling call options, and the price of the call option is 20% higher than the current price. Its goal is to allocate 1.5% of the net worth of Bitcoin held in the fund as a dividend, which may yield an annual rate of return of 18%.
According to Tsai, the Bitcoin Income Fund charges 100 fixed management base points per year. If the return exceeds 18%, it will receive a 30% return, and the rest will be reinvested in the fund.
The new fund is currently accepting the subscription, but no investors have confirmed the subscription.
“We have a lot of investors expressing interest, and we are working hard to get the actual private placement memorandum and subscription agreement for them.”
The Buy-Write Income Fund (ETB) managed by Eaton Vance Tax is one of the similar products in the field of stock options based funds.
According to Morningstar, the total cost of the $393 million fund is 111 basis points, including a management fee of 100 basis points.
The average return on its option-based fund category was 1.25% over the same period of the previous year and 5.1% during the three-year period. As of September 17, it has been 10.44% so far this year.
a dangerous game
One of the ways in which the fund operates is to accurately identify mispricing in the call options market. However, Samuel Lee, financial adviser at Chicago-based SVRN Asset Management, told CoinDesk that it is difficult to do this considering cryptographic derivatives such as options.
"This is a very new asset class and the market is not efficient," Lee said.
“Compared to more mature stocks and fixed-income markets, skilled investors will get more out of those who are less skilled in such markets.”
The financial adviser also said that although the company is likely to achieve a monthly rate of return of 18%, the fund's total return should be more important to investors.
"Many yields with very high yields often sacrifice price returns," Lee said. “When you get a high premium, you may sacrifice all your upside potential.”
He added that too much attention to the rate of return may also be at risk because investors' principals in the fund are meeting their monthly income targets.
However, the inefficiency of the options market may be an opportunity to encrypt derivative funds, Lee explained.
“The more inefficient the market, the less smart people are concerned about it and the more mispricing it will be.”
Lee added that embedded transaction costs can also erode the total return of such funds.
Lee said that the wide range of bid-ask spreads in the crypto derivatives market means low liquidity and high transaction costs, as well as taxing income.
Create based on derivatives
All of these funds are possible, because today's large crypto-equity exchanges provide simple operations that provide a new platform for crypto-derivative transactions.
This month, Binance acquired the cryptographic exchange JEX to facilitate its cryptographic derivatives for traders. JEX registered in Seychelles offers spot and derivatives of digital currency, including options and futures trading.
In August, Deribit, the encryption futures exchange, said it has become one of the first encrypted futures and options exchanges to offer Bitcoin and Ether Derivatives block trades.
In March of this year, Caspian, an institutional trading and portfolio management platform supported by Galaxy Capital, launched cryptocurrency derivatives trading, including futures and options.
There are more exchanges that plan to offer such services.
Derivatives Market The Chicago Mercantile Exchange Group (CME Group) announced in September last year that it will offer Bitcoin futures contract options starting in the first quarter of 2020.
Seed HX subsidiary Zero Hash, the company's hosting and settlement service provider, will support derivatives trading and offer options trading on a future date.
Will investors buy it?
The prospects for new funds and new structures may be exciting, but it remains to be seen whether the Wave Fund will be attractive as management waits for the first major investors to subscribe.
Tsai, who was responsible for alternative investments in Asia Pacific at Alliance Berstein, said that Wave Financial is approaching qualified investors and high net worth individuals and has been developing distribution networks in major international markets.
Tsai said that several companies have expressed interest in distributing the fund, one of which is located in Southeast Asia and is required to be the exclusive distributor of the region.
Tsai said that Latin America is another potential area.
“According to my previous experience, Latin American investors in the field of wealth management are actually similar to those purchased by Asian investors.”
He said the fund provides investors with a less volatile way to make money from bitcoin, and as long as the price of bitcoin rises below 20%, it can earn a premium.
In addition, this fund based solely on cryptographic derivatives can also diversify the investor's portfolio because it is not relevant to most traditional asset classes.