In the world of hedge funds, the old adage really is true: you have to have money to make money.
The barrier to entry for an individual investor is frequently $500,000, with portfolio managers themselves needing as much as $200m just to get started. But the potential rewards are equally large.
It was a tough lesson to learn for Mona El Isa, a former Goldman Sachs vice president, who after being selected as a member of Forbes 30 Under 30 and raising $30m for her own fund, found herself surprisingly under-prepared to compete against other much more heavily capitalized firms.
Dismayed by a competitive environment that favored those who already had vast fortunes, El Isa ceased her fund’s operation and took year off to study blockchain, a distributed ledger she believed had the power to level the hedge fund playing field by lowering the barrier to entry and lessening regulatory burdens.
Today, the ethereum-based hedge fund platform she founded as a result of that sabbatical is announcing the hire of George Hallam, the Ethereum Foundation's former head of external communications to help bridge the gap between hedge fund demand and blockchain technology.
El Isa told CoinDesk:
"For people who are willing to consider reinventing the space from scratch, the really interesting property that I feel that blockchain can apply to asset management is it’s not just about automation, it’s about enforcement."
Lowering the barrier
Founded in February 2016 and formally launched in August, Switzerland-based Melonport consists of a series of ethereum-based smart contracts designed to automate some of the most expensive aspects of building a hedge fund.
El Isa and her co-founder, mathematician and Solidity contributor Reto Trinkler, are now joined by their third hire, Hallam, who will run Melonport's business development practice.
To serve those aspiring hedge fund managers – and existing managers interested in potentially cutting costs – the Melonport protocol consists of two sets of ethereum-based smart contracts, Melon Core and Melon Modules, comprised of self-executing code programmed to execute tasks human beings would have carried out in the past.
While Melon Core executes to ensure that portfolio managers build services which adhere to the underlying codebase, Modules is a mix-and-match series of functions including price feeds, volatility calculations and daily P&L calculations that can be crafted into any number of hedge investment ideas.
Taken together, the two elements of the protocol are designed to help managers easily set up hedge funds, code predefined, immutable, investment parameters into the smart contracts that ensure commitments are kept, and leave an auditable track record of a fund’s success to help attract future investors and simplify regulatory compliance.
"The idea is to catch people before they set up their fund and say to them: You don’t actually have to worry too much about the software," said El Isa.
If successful, the hedge fund platform could significantly lower the barrier to entry for aspiring hedge fund managers with a new model they want to test and limited funds.
Benefits of blockchain
Those new market participants, in turn, could theoretically reduce the minimum amount required to invest from hundreds of thousands of dollars, to fractions of an ether (ethereum's digital currency) or any number of future currencies capable of running on a blockchain.
The bootstrapped Melonport is part of young, but rapidly growing pool of asset management platforms currently pursuing similar blockchain-based solutions.
But there’s plenty of market share to fight over.
According to the most recent Preqin Global Hedge Fund Report, the total hedge fund industry assets under management in 2015 was $3.2tn, and that doesn’t even count the hedge funds that don’t exist yet because the barrier to entry is too high or the assets are too new.
Battling for a slice of both the existing market share, and market share that doesn’t yet exist are about 10 different firms that we know of.
Newly launched, diversified blockchain portfolio, CoinFund provided CoinDesk a document listing 11 decentralized asset management platforms (DAMPs), two of which are marked as 'dead', and seven of which are marked as pre-beta, including Melonport, Iconomi and Iterative Instinct (i2).
At the core of these services is a new value proposition brought by blockchain into the existing hedge fund strategies.
"A lot of these processes can be done much more efficiently and faster and more effectively and more transparently to the investors investing in those hedge funds, by using smart contracts," said El Isa.
While bootstrapped so far, plans are already in motion for Melonport to raise additional funds via a token sale in mid-February.
In the build-up to that event, Melonport has been working with nine partners to beta test its smart contracts.
Current partners include CoinFund, Satoshi Fund, Technologies Capital, and Privatemarket.io, among others, with additional partnerships currently in the works. "We’re in discussions with many, many more," El Isa said.
Advisors to the project are Andreas Glarner, who has been working with Swiss legal firm MME to create new ways for ICOs to be legally compliant, blockchain venture capitalist Jehan Chu, and Gavin Wood, ethereum co-founder and founder of venture-backed Ethcore.
At Melonport's expected launch later this year, the investment opportunities provided will be limited to ether-denominated digital assets 'custodied' directly on the blockchain – a decision that will potentially simplify regulatory requirements.
On 15th February, the startup is set to begin selling its tokens, dubbed MLNs, to investors and those who want to use the hedge-fund service.
In total, 1,250,000 tokens will be created and dispersed over two periods, the second expected to occur later this year.
After launch, an unspecified amount of additional token will be minted "periodically" to incentivize the construction and maintenance of open-source modules.
Melonport joins a growing list of innovative investment vehicles not marketing its product to US investors due to regulatory concerns.
Core to Melonport's business model is the idea of an 'Internet of blockchains' similar to advisor Gavin Wood's Polkadot project, to which Melonport co-founder Reto Trinkler was a contributor.
The end result could be the creation of a suite of investment tools based on the hedge fund manager's strategy. High-speed trading, for example conducted on an enterprise-grade version of ethereum, and longer-term investments conducted via blockchains with slower settlement times.
By August 2017, Melonport expects to implement version 1.0 of its protocol and complete the first audit of its code.
Additional audits are planned to occur through to 2018, with version 1.0 of its governance model implemented in February 2019, along with the final deployment
"We have just completed a second prototype," El Isa told CoinDesk. "And are ready to start a round of security auditing from end of February onwards."
El Isa image via YouTube