FIDELITY DIGITAL ASSETS TO PROVIDE CUSTODY FOR BITCOIN DERIVATIVES YIELD FUND

An asset manager intends to go to a fund based on bitcoin options as significant exchanges make the trading of crypto derivatives more available to investors.

Wave Financial, based in Los Angeles, introduced the Wave BTC Income & Growth Digital Fund, touting that the fund is the first on the market to be based on crypto-derivatives yields.

According to Ben Tsai, he think that what was missing in the crypto market is a lot of very solid traditional types of products, but with crypto assets. After several months of due diligence, he said Fidelity Digital Assets is now on board to provide custody for the fund.

The suggestion is to capture portion of a new yield product market in crypto space, building on traditional fund creativity and growing crypto-derivative platforms that underpin the technical elements of these new assets.

The Wave Fund plans to produce monthly revenue with the premium from the sale of call alternatives at a rate 20% greater than the present cost at the moment. It aims at distributing a dividend that is 1.5% net asset value of the bitcoin held in the fund, potentially resulting in an annual yield of 18%.

According to Tsai, the Bitcoin income fund charges 100 basis points of fixed management annually, taking 30% of any returns above the 18% yield, putting the rest back into the fund. The new fund is currently open for subscriptions, but there haven’t been any investors who have confirmed to subscribe.

Then, he also said that they have a number of investors that have expressed interest and we are working to get them the actual private placement memorandum and subscription agreement.

Ben Tsai, managing partner of Wave Financial

One of the peer products in the equity option-based fund space is Eaton Vance Tax-Managed Buy-Write Income Fund (ETB).That $393 million fund’s total expense ratio is 111 bps including 100 bps management fee, which is on the lower end of the fee spectrum for option-based funds, according to Morningstar.The average return in its option-based fund category is 1.25 percent over the last year, 5.1 percent over the three-year period and 10.44 percent year-to-date as of Sept. 17.

RISKY GAME

One way this fund can operate is to define mispricing in the call options market accurately. However, it’s tricky to achieve that given crypto derivatives such as options, Samuel Lee, financial advisor at Chicago-based SVRN Asset Management, told CoinDesk.

“They are a very new asset class whose market is not very efficient,” Lee said, adding:“Skilled investors are going to take a lot more advantage of those who are less skilled in such markets when compared to more mature equity and fixed income markets.”

The financial advisor also said, while it is possible for the firm to realize 18 percent monthly yield, the fund’s total return should matter more to investors.“A lot of income funds with very high yields are often sacrificing price returns,” Lee said.

He added that focusing too much on yield would also risk meeting monthly revenue objectives with the fund’s main investor. However, inefficiency in the options market could be an opportunity for crypto-derivative funds. “The more inefficient the market is, which means fewer smart people are looking at it, the more mispricing there is going to be,” he said.

Embedded transaction costs can also eat in the total returns of such funds. Hence,The wide bid-ask spread in the crypto derivatives market implies low liquidity and high transaction cost and there will also be taxes imposed on the income.

WILL INVESTORS BITE

The prospects of new resources and structures may be interesting, but if the Wave fund gains traction, the jury is still out, as management is waiting for the first significant investors to subscribe.

Tsai, who led alternative investments in the Asia-Pacific region at Alliance Berstein, said Wave Financial is approaching accredited investors and high-net-worth individuals, and it has been developing a distribution network across major international markets.Several companies have voiced interest in distributing the fund, including one in Southeast Asia, asking to be a regional exclusive distributor.

Latin America is another region with potential, Tsai said. Based on Tsa experience, the Latin American investors in the wealth management space actually buy similar products as Asian investors and he describing investors from these regions as being less risk-averse.He said the fund provides investors with a less volatile manner to make cash out of bitcoin as it earns premium as long as the price rise for BTC is below 20 percent. Moreover, as it is uncorrelated to most traditional asset classes, the crypto derivative fund could also diversify portfolios of investors, Tsai said.

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