What is an investment Fund Token?

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What is an investment Fund Token?

An Investment Fund is often seen as a safer route to investment than purchasing shares as you are part of a group of collective of investors as opposed to investing on your own. 

The collective investment can be:

  • comprised of different types of investors or focus on a specialised group, 

  • managed by analysts (typically a Fund Manager), and 

  • diversified over different investments to spread the risk. 

When investing into this structure the Funds are pooled and the money is aggregated in order to invest with the potential for return. Funds are split into units. Each unit represents a tiny share of the Fund’s underlying investments. The investors will receive units of the Fund based on their investment. These units are created by the Fund Manager (VC) when an investor buys into the Fund. For many funds there is no limit on the number of units that can be issued, so there is no limit on the number of people who can invest and prices are fixed once a day at their net asset value, so these funds are sometimes described as ‘open-ended investments’. 

Funds can also be close-ended investments, where the fund issues a fixed number of units which may not be redeemable from the Fund, so can only be purchased on the open market.

A Fund Manager will then invest on their behalf. Funds can invest in various types of assets, including shares, bonds or property, depending on the investment objective of the Fund.

Every day, at a set valuation point, the Fund Manager will calculate the value of the Fund, giving a price per unit. To work out this price, the Fund Manager adds up the total value of investments in the Fund and divides by the number of units. Anyone wanting to buy or sell units in the Fund will do so at the price calculated at the valuation point, though they will need to place orders to buy or sell units before the valuation point as this will need to be factored into the valuation

Funds may be actively managed, where the Fund Manager will choose and update the investments or passively managed, where investments are linked to a stock market index so effectively the Fund will purchase the same shares being tracked to reflect the indexes performance. 

Common types of Investment Funds include

  • Venture Capital - This type of fund diversifies its stake in high risk, high return, small -medium enterprises (SME’s). Investments are typically less than 50% spread across a wide range to manage the risk.

  • Private Equity - These funds are aimed primarily at high net worth individuals and institutions. Funds are invested in purchasing 100% ownership in one or more companies. The assets are then locked up for a preset duration until they are eventually liquidated.

  • Index Fund - A passively managed fund that is linked to the performance of a portfolio of  stocks and bonds and will seek to mimic its performance.

  • Mutual Fund - A fund operating like a virtual company.  The Fund invests in a diversified portfolio of assets and relies on active research and expertise from the Fund management team. 

The trend towards applying crypto-technology solutions to more traditional methods of fundraising has led to the emergence of a new type of investment fund model, the Tokenised Fund. 

Tokenised Funds

Digital assets (digital securities/security tokens) which could be any of the above are issued on the Blockchain that is representative of investment into the Fund.

The fund is created in collaboration with a ‘Tokeniser’ platform such as Harbor or Odilia that generates digital tokens linked to the prescribed units. The Tokeniser will work with the fund to incorporate the regulatory and security requirements of the investment into the smart contract, onboarding systems and offering page on the platform.These tokens are then offered to investors through the Tokeniser’s platform or through a partner digital security exchange.  

OpenFinance and Tzero are existing digital security exchanges that fund tokens can be traded on and several traditional exchanges will be launching their own digital securities listings by the end of the year, which will then enable secondary trading of these digital assets through traditional routes. 

Benefits

Funds offerings can take the units and create digital securities that can offer many benefits as outlined below.

  • Liquidity - Traditional Fund investment has meant that investments were locked up until they were released through some form of offering such as an IPO. With Tokenised investments these can be traded without waiting for such an event to occur allowing for greater liquidity.  
    In traditional offerings of this sort, the Fund Manager would supervise this and the contractual requirements surrounding this. The Blockchain ledger in combination with the algorithms that can be built into smart contracts could link buyers and sellers and manage these settlements in real time. 

  • Smart Contracts - On the topic of smart contracts, the levels of programmable code and functionality that can be built into these tokens can do away with much of the regulatory and admin requirements of managing portfolios and investments. 
    The ledger can:

    • act as a real time cap table,

    • creating trustless networks for monitoring and recording of transactions globally,

    • enable go through all required checks and contractual agreements,

    • incorporate (inbuilt) onboarding for investors,

    • enhance security,

    • prevent transference of digital securities or units to individuals or entities that had not been approved,

    • manage payment.

  • Interoperability - Using a codified standard, all such units or digital securities could be easily transferred using a myriad of systems that allows holding and trading on multiple platforms and formats without the need for extensive oversight by the Fund Manager. All changes would be monitored through the technology and allow for a greater degree of utility for the user.
    The versatility of the Fund Token has the potential to open up these types of funding to a wider demographic of investor and down the line could allow for peer to peer trading or through Alternative Trading Systems (ATS).

  • Costs - Using Blockchain technology to automate on-boarding, KYC, AML, transaction monitoring, ownership, investment tracking, etc. would cut down considerably on the time and costs for these services that would normally necessitate either in-house or third party intermediaries. Using a technological solution can also allow for greater scalability of systems.

  

The advent of Blockchain allows for the use of this new technology not necessarily to revolutionise the fund market but certainly to allow for greater fluidity and ease of use, as well as open it up to a wider market of investors. 


References for this article can be found here.

Gabriele Teodoro