Investment Framework
Last updated
Last updated
We divide stablecoins we monitor into tiers; we also divide DeFi protocols into tiers. For BenchMark Demo Fund, we only invest in Tier 1 and Tier 2 stablecoins and protocols.
Generally, the allocation to each stablecoin or protocol follows the below max percentage:
Tier 1 protocol
20%
Tier 2 protocol
10%
Tier 1 stablecoin
20%
Tier 2 stablecoin
10%
If an investment has more than one Tier 2 (containing more than one Tier 2 stablecoins, or more than one Tier 2 protocols, or both Tier 2 stablecoin and Tier 2 protocol), then its max allocation will be further reduced.
T1 Stablecoin
T2 Stablecoin
T1 Protocol
20%
10%
T2 Protocol
10%
5%
Based on the above, the BenchMark Demo Fund has the below allocation on 16 Oct 2024.
We reckon the fact that there are hacks in the DeFi industry and there are no perfect solution to prevent it. We do not conduct technical audit of the stablecoins and protocols we invest; instead, we rely on public audit disclosures. Nonetheless, we do place a huge emphasis on the security risk concern, and we believe a proper diversification is the way to mitigate this issue.
We will perodically rebalance the portfolio above, based on: 1) the parameter constrains as set-up by the risk-framework above; 2) the yield of the above pools (or other pools with similar risk level); 3) the slippage of entering and exiting a portfolio.
When we look at the yield of a pool, we look at a slightly longer horizon, such as a few weeks, for making the investment choice. This is to reduce switching costs, in particular, the slippage costs of converting one stablecoin to another. We also look at the nature of the yield to see if it's lasting.
We generally believe that the stablecoin market is locally efficient and market participants will arbitrage the yields, moving liquidity from low yield pools to high yield pools, so that in equilibrium, most of the pools have the same risk-adjusted yield. When this does not happen, we occasionally take a position of one stablecoin and wait till the market balances itself.
There's no carry but a fixed fee on the AUM managed by the Demo Fund. We opt for fixed fee, as this fund is a tracking fund and should not be incentivised to seek higher yield. For our advisory clients, this is optional and switchable to carry, or a combination of both.
The fund manager charges a 2% fee per annum on the AUM managed by the Benchmark Demo Fund. The fee is charged each time the $BENCHMARK price is updated by the portfolio manager.
The Demo Fund is meant to be evergreen. There's liquidity for partial exit and we will top up the Uniswap pool any time it falls below 10% of the fund AUM. For large exits, you can contact us and we will allocate more to the Uniswap pool for exit liquidity.
The Demo Fund will be closed if it's unit price falls below $0.8, or the manager thinks it's in the interest of the holders to close it. In such event, all the remaining portfolio will be liquidated and made available to redeem $BENCHARK in the Uniswap pool.
