This case study delves into the key processes of an investment fund, namely subscriptions, Net Asset Value (NAV) calculation, fee extraction, and redemptions. Let’s explore how Fume's administration approach streamlines these operations for an on-chain fund compared to a traditional fund.
The following processes for a traditional fund are described from a direct personal experience of a Luxembourg-based alternative investment fund (under AIFMD). The exact procedure could vary depending on the chosen structure and fund administrator. This specific fund is investing in liquid assets and has an open-ended policy with a monthly NAV calculation.
The onboarding of an investor (LP) always starts with the KYC and AML checks. Once all the documentation has been collected and the investor has been approved, it’s time to receive the subscription payment. Let’s imagine that the investor and the fund manager agreed on a subscription of $100’000.
Usually, the subscription is received via a bank transfer, the wire coordinates are shared with the investor. Possible issues arise:
Another option would be to subscribe via a clearing system (Euroclear or Clearstream) using the ISIN code. In that case, although there is no initial KYC required (already performed by the investor’s bank), the fund shares are held under the intermediary name. There is a tradeoff between the ease of execution and additional intermediaries’ commissions.
Alternatively, the subscription can be received directly from the wallet of the investor to the wallet of the fund. Other potential issues could arise:
The capital is received in a bank account or a wallet segregated from the rest of the portfolio.
Once the capital is received, the manager has to communicate the transaction’s information to the administrator. After the next NAV calculation, the fund manager will then manually move the assets into the rest of the fund’s portfolio.
Let's start looking at how an on-chain fund tackles these issues. The fund manager whitelists the investor specifying the subscription amount and other properties.
The investor receives an email with the invitation to join the platform. Once the specified address is connected, the transaction of the subscription payment is pre-filled.
The investor is forced to send the capital from the correct (pre-screened) wallet, with the correct amount, to the correct address (i.e. the fund’s smart contract) without any risk of manual error. Hence, avoiding any risk of losing the capital. The transaction is then settled on-chain within a few seconds for an insignificant transaction fee.
After the next NAV calculation, the subscription liquidity is automatically moved from the fund’s smart contract into the rest of the fund’s portfolio. At the same time, the new tokenized fund shares are issued to the subscribing investor.
To calculate the latest NAV, the fund manager provides the administrator with information concerning the fund portfolio’s transactions (e.g. extract from exchanges in .csv/.pdf format).
The administrator then proceeds to calculate the new NAV value, performing the shares equalization, computing the management, and performance fee (if any). This procedure can take between a few days and a few weeks. The price usually depends on the amount of portfolio transactions, assets, and the total amount of investors.
For assets held on-chain or via supported exchanges, the portfolio positions are fetched automatically. To calculate the NAV, the fund manager simply validates the total assets and liabilities tracked from Fume’s protocol and clicks “Calculate NAV”. The protocol will instantly calculate the new NAV value, and directly perform the equalization and computation of fees.
Fund managers usually earn from the following fees:
For every subscription, the fund manager needs to calculate the subscription fee and manually extract it to its account (e.g. via bank or wallet).
Similarly, for every redemption, the fees need to be calculated and manually extracted.
After every NAV calculation, the administrator computes the management and performance fees to be manually extracted from the fund’s portfolio by the manager.
Each time a fee is extracted, the manager has to report to the administrator to ensure the correctness of the following NAV calculation.
Whenever a subscription payment is received, the fee is automatically extracted and sent to the manager.
The management, performance, and exit fees are computed with the NAV calculation event and recorded on-chain as fund liabilities.
Fume's protocol lets the manager settle all liabilities in a single transaction, without any additional reporting. Alternatively, should there be any incoming subscription, the pending fees will be automatically settled and the remaining capital (after fees) will be then forwarded into the rest of the fund’s portfolio.
When an investor intends to redeem some shares, an email has to be sent to the fund manager requesting the redemption.
The manager will notify the administrator that, at the next NAV, the shareholder register needs to be updated.
At this point, the administrator will communicate to the manager the redemption amount after exit fees.
Finally, the manager has to send the capital to the redeeming investor. It has to be emphasized, that for each redemption, the manager has to execute a separate transaction. Once executed, it needs to be reported to the administrator to remove the pending liability. Similarly to the subscription process, the following issues apply:
The investors notify the redeeming intention on the Fume’s platform (sending the tokenized shares back to the fund’s smart contract).
At the upcoming NAV calculation, the redeeming amount is automatically computed and added to the fund’s pending liabilities. The redeeming amount can be directly offset from an incoming subscription, or settled by the manager at a later stage with the remaining liabilities (e.g. pending fees).
Multiple redeeming investors at the same time will not result in any additional manual work from the manager, as they would all be paid automatically from the smart contract. Once again without requiring any report from the manager.
A traditional fund manager has to execute the aforementioned tasks sequentially, resulting in tedious, time-consuming, costly, and error-prone management.
Although when taken individually, these processes already show a vast improvement with an on-chain administration, the real breakthrough happens when executed simultaneously.
To conclude, let’s look at a scenario where in a given month we have:
The protocol will perform the following tasks in a single execution:
The comparison between on-chain and traditional funds clearly demonstrates a substantial shift towards more efficient, transparent, and responsive fund management models. By harnessing the power of blockchain technology, platforms like Fume simplify traditionally complex processes and offer significant improvements in speed and accuracy.
Join the era of efficient fund administration and explore how it can benefit your financial strategies. We invite you to get in touch to learn more. Our team at Fume is ready to assist you in setting up your own on-chain fund, guiding you through each step of the process to ensure a seamless and successful transition to this cutting-edge technology.
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