For sophisticated investors willing to take calculated risks, hedge funds can offer an attractive way to earn active returns while diversifying their portfolios. According to the SEC, there are currently over 9,000 hedge funds worldwide managing $3.6 trillion in assets. These funds pool resources from multiple investors to invest in a variety of related strategies, often betting that one security or sector will rise as another decreases in value. Getting both parts of the strategy right can lead to above-average returns for both the fund and its investors.Investing in hedge funds has historically been a challenge. Investors often need to know the right people to access opportunities, with minimum investments running into the tens of thousands of dollars, and frequently much higher. These investments are also often difficult to exit due to limited redemption windows and occasional gating, making emergency or short-term liquidation complicated and potentially unprofitable. As digitization transforms the private securities market, hedge funds are beginning to explore the advantages of going digital for themselves and their investors.
Inside the First Digital Hedge Fund
The Protos fund (PRTS), which recently listed its shares on the Openfinance platform, is the first tokenized actively managed hedge fund available in a digital token format on any alternative trading system. Protos allows investors to join an evergreen fund that invests in a variety of digital assets and cryptocurrencies, aiming to deliver significant returns while limiting losses during market volatility and downturns.
Protos provides a clear example of how digitization can offer significant benefits for both issuers and investors, without endangering the sensitive information critical to hedge fund strategies. Key advantages include:
- Increased capital-raising abilities. Digitization allows issuers to potentially raise more capital – an important consideration for funds whose fee structures are partially based on assets under management - for three main reasons:
- Digitally formatted hedge fund shares can expose funds to a broader market than traditional offering methods
- Investors are potentially more likely to purchase shares if they can more easily buy and resell them on the secondary market
- Increased liquidity for any asset has the potential to boost valuations
- More efficient distributions to investors. The Protos fund can make payments to limited partners directly, saving administration time for issuers and keeping investors satisfied with quicker returns.
- Broader access for investors. Protos can now be bought and sold by U.S. accredited investors (subject to SEC shareholder limits). Non-U.S. investors are also able to own the Protos fund. While investing in hedge funds has traditionally required a personal connection to the deal, qualified investors can buy and sell Protos 24/7/365 on Openfinance. A secondary market allows more investors, around the world, to get exposure to this asset class without the significant capital allocation minimums common in the hedge fund industry.
- Greater transparency for investors. Protos publishes its net asset value (NAV) on a monthly basis – a level of detail virtually unheard of in the traditional hedge fund market. By making asset price and holdings publicly available, hedge funds can help investors make more informed decisions while building trust and interest in their offerings.
A Window of Opportunity
As hedge funds like Protos embrace digitization, funds across the marketplace are evaluating whether a shift to digital makes sense for their structure. These solutions are ideal for funds that are seeking broader pools of capital, streamlined administration, and greater transparency for investors.
In exchange, digitization exposes hedge fund issuers to a larger base of multi-generational investors and offers administrative cost reductions. Digital securities are also fully regulated by the SEC, giving hedge funds confidence they’re in compliance while streamlining many compliance-related requirements. For funds willing to move into the digital age, digitization can lead to new opportunities for both investors and issuers.