Recently Melon Protocol published an article with an update about how their investment funds work. In the article, they went into the details of the fund’s structure and how they’re different from other traditional investment firms.
How does investment funds work?
First, it’s important to understand how a traditional investment fund work. Without getting too into details, the traditional investment management businesses earn their income by charging investors fees for their services.
There are many types of fees for various services, but the two main types are Management- and Performance Fees.
The fee types are for the most part independent of each other and intend to reward different aspects of investment management.
Melon Fund, on the other hand, is trying to change things up a bit. Melon fund does not try to reinvent the wheel when it comes to fees. They do, however, reinvent how these fees are paid by the fund.
Instead of using cash, or liquidating positions to pay fees, the fund smart contract itself calculates and creates new shares (or fractions), allocating them to the investment manager’s own account holdings within the fund.
At that point, the investment manager can continue holding an increased number of shares in their own fund, or redeem the shares to pay their own operating costs, expand their research activities or whatever else they deem appropriate.
The Melon fund smart contract autonomously and verifiably maintains the shareholder accounting impact in a truly reliable and transparent manner.
Paying fees in this manner has a few interesting and beneficial side-effects:
- Assets do not leave the fund, as would a cash payment.
- There are no unnecessary trading or cash management transactions. Investors and managers have access to real-time fee accrual metrics.
- Finally, the incentives to the manager are reinforced beyond a cash performance fee by being paid in the currency that is their own product.
This is just another example of how powerful blockchain can be when it comes to transactions. This is done by leveraging smart contracts. If you want to learn more about real-life examples of smart contracts, read our article on smart contracts here.