Fund Redemption

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Last updated 3 years ago

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Fund Redemption

Mechanism

To redeem fund tokens for the denomination asset, an investor connects the wallet to Avareum's protocol and provides redemption details such as the fund tokens and the amount to redeem. The fund tokens should be available no less than the amount specified. After the investor has confirmed the redemption request, the smart contract begins the following process:

Verify basic qualifications, including but not limited to:
1. Whitelisted, if applicable, and not blacklisted
2. Sufficient amount of the fund tokens in the wallet
Put the request in the queue with the fund tokens transferred from the investor's wallet. Wait to proceed when the system is ready.
Calculate and mint fund tokens that are used to charge fees for existing investors:
1. Calculate management fee and mint fund tokens to the management fee vault
2. Calculate performance fee and mint fund tokens to the performance fee vault
Calculate: $\mathtt{nav}_t =$ the net asset value (pre-allocation) $\mathtt{tokens}_t =$ the token supply, including tokens in the fee vaults $\mathtt{price}_t = \dfrac{\mathtt{nav}_t}{\mathtt{token}_t} =$ the fund token price $\mathtt{bid}_t = \mathtt{price}_t \cdot ( 1 - \delta_{\mathtt{bid}})$ $\mathtt{ask}_t = \mathtt{price}_t \cdot ( 1 + \delta_{\mathtt{ask}})$ where $\delta_\mathtt{bid}, \delta_\mathtt{ask}$ are spread rates
Calculate the withdrawal value
1. Let $\mathtt{withdrawal\_tokens} \ge 0$ be the number of fund tokens claimed by the investor. It is required that $0 \le \mathtt{withdrawal\_tokens} \le \mathtt{tokens}_t$
2. The investor will receive her fund back in the denomination asset $\mathtt{withdrawal\_value} = \mathtt{withdrawal\_tokens} \cdot \mathtt{bid}_t$
If there is sufficient denomination asset:
1. Burn the claimed fund tokens
2. Update the total supply of tokens: $\mathtt{tokens}_{t+1} = \mathtt{tokens}_t - \mathtt{withdrawal\_tokens}$
3. Transfer the denomination asset back to the investor's wallet

Note that when another fund operation is being processed or there is an insufficient amount of the denomination asset in the portfolio, withdrawal requests will be put in a queue, which may require some waiting time. Once the assets are successfully liquidated and the redeemed fund tokens are burned, the withdrawal fund will be returned to the investor's wallet automatically. Our web portal will keep the investor updated with the current redemption status.

Currently, Avareum supports USDC as the main denomination asset and will soon expand to accept other stable coins.

Liquidation Guideline

The withdrawal request submitted by an investor leads to partial liquidation of assets in the portfolio. Derived using the same rationale given in the subscription procedure, each asset is liquidated proportionally to the current portfolio weight. That is, the current portfolio weight is also maintained at withdrawal.

There are cases in which the liquidation procedure is not achievable. In particular, non-investible assets, such as staking credits, airdrops, locked-up assets, neither have an entry action nor a concept of partial claims. That is, these assets must be claimed in full or never be claimed, provided that they are not locked up at all. We discuss the principles used for handling such cases below.

Non-investible assets will be liquidated first before all other investible assets. That is, the investible assets can be further liquidated only when the total value of the non-investible assets is insufficient for withdrawal. This design is efficient and preferable for investors because the number of assets to be liquidated is less, if not equal, thus reducing transaction costs at withdrawal.
Assets in their non-investible form are not meant to be invested. Note that an asset that has been claimed to the wallet and has thereby become investible is considered fundamentally different from the non-investible asset that was previously staked, credited, or locked up on a platform. We insist that if the fund manager has an intention to keep these assets, she can and should explicitly state them in the portfolio weight using their investible form. See mental accounting bias for further clarification. Logically, there must exist a market from which the assets can be acquired without unnecessary complexity; otherwise, their strategy-aware definition lacks the pricing method, invalidating the definitions themselves.
Regardless of the withdrawal amount, all of the non-investible assets will be claimed. If the total value of the non-investible assets is less than the withdrawal value, then each of these assets is liquidated proportionally to the current composition weight among the non-investible assets. Otherwise, all of these assets are fully liquidated and the investible assets are subsequently liquidated to fill up the remaining withdrawal amount.
One might suggest claiming and liquidating a minimum subset of non-investible assets whenever possible. While this may reduce the number of liquidated assets a little further, an unfortunate investor might experience unfair transaction costs such as high slippages in illiquid assets, taxes, or uncontrollable factors specific to the selected subset. Proportional liquidation among non-investible assets, as we propose, trades such unexpected risks off with more liquidation transactions and helps fairly distribute the transaction costs in subsequent withdrawal requests once the assets are in the investible form.
Regular or conditional rebalancing is not strictly assumed in our protocol yet encouraged in order to restore the portfolio allocation whenever favorable. Particularly, when the withdrawal value is less than the total value of the non-investible assets, the non-liquidated portion remains in the investible form. The deviation that accumulates by subsequent deposit requests can be resolved by the next rebalance.

The liquidation guideline is a mere suggestion - not intended to be mandatory. Fund managers may reserve the right to follow their own strategies.

We identify and address all the cases below as follows. Let $w=[w_1, w_2,...,w_j, w_{j+1}...,w_k, w_{k+1}, ..., w_n]$ be the current portfolio weight. We have $w_i > 0$ since long and short positions on the same underlying asset differ in their indices thanks to the strategy-aware definition. Assume the followings:

$w_1, w_2, ..., w_j$ represent the weights of investible assets
$w_{j+1}, ..., w_k$ represent the weights of claimable non-investible assets
$w_{k+1}, ..., w_n$ represent the weights of locked-up non-investible assets

Also, assume respectively that:

$\mathtt{investible} = \mathtt{nav} \cdot\left( \sum_{i=1}^j w_i \right)$ represents the value of investible assets
$\mathtt{claimable} = \mathtt{nav} \cdot\left( \sum_{i=j+1}^k w_i \right)$ represents the value of claimable non-investible assets
$\mathtt{locked} = \mathtt{nav} \cdot\left( \sum_{i=k+1}^n w_i \right)$ represents the value of locked-up non-investible assets

An investor submits a withdrawal request of value $\mathtt{liquidation\_value}$ , leading to 3 different cases and handlings as follows.

If $0 \lt \mathtt{liquidation\_value} \le \mathtt{claimable}$ : $\Delta w = \dfrac{\mathtt{liquidation\_value}} {\mathtt{claimable}} \cdot [0, 0,...,0, w_{j+1}, ..., w_k, 0, ..., 0]$
If $\mathtt{claimable} \lt \mathtt{liquidation\_value} \le \mathtt{claimable} + \mathtt{investible}$ :\begin{align*} \Delta w &= [0, 0,...,0, w_{j+1}, ..., w_k, 0, ..., 0] \\ &\quad + \dfrac{\mathtt{liquidation\_value}-\mathtt{claimable}}{\mathtt{investible}} \cdot [w_1, w_2,...,w_j, 0, ..., 0] \end{align*}
If $\mathtt{claimable} + \mathtt{investible} \lt \mathtt{liquidation\_value}$ : \begin{align*} \Delta w &= [w_1, w_2,..., w_k, 0, ..., 0] \\ &\quad + \dfrac{\mathtt{liquidation\_value}-\mathtt{claimable}-\mathtt{investible}}{\mathtt{locked}} \cdot [0, 0,...,0, w_{k+1}, ..., w_n] \end{align*} When necessary, a force close shall be applied to unlock the assets, even with additional fees or penalties.

Note that the weight $\Delta w$ represents the liquidation proportion for each asset with respect to the entire portfolio value.

PreviousFund Subscription NextFund Rebalancing

Last updated 3 years ago

Was this helpful?

Mechanism

Verify basic qualifications, including but not limited to:
1. Whitelisted, if applicable, and not blacklisted
2. Sufficient amount of the fund tokens in the wallet
Put the request in the queue with the fund tokens transferred from the investor's wallet. Wait to proceed when the system is ready.
Calculate and mint fund tokens that are used to charge fees for existing investors:
1. Calculate management fee and mint fund tokens to the management fee vault
2. Calculate performance fee and mint fund tokens to the performance fee vault
Calculate: $\mathtt{nav}_t =$ the net asset value (pre-allocation) $\mathtt{tokens}_t =$ the token supply, including tokens in the fee vaults $\mathtt{price}_t = \dfrac{\mathtt{nav}_t}{\mathtt{token}_t} =$ the fund token price $\mathtt{bid}_t = \mathtt{price}_t \cdot ( 1 - \delta_{\mathtt{bid}})$ $\mathtt{ask}_t = \mathtt{price}_t \cdot ( 1 + \delta_{\mathtt{ask}})$ where $\delta_\mathtt{bid}, \delta_\mathtt{ask}$ are spread rates
Calculate the withdrawal value
1. Let $\mathtt{withdrawal\_tokens} \ge 0$ be the number of fund tokens claimed by the investor. It is required that $0 \le \mathtt{withdrawal\_tokens} \le \mathtt{tokens}_t$
2. The investor will receive her fund back in the denomination asset $\mathtt{withdrawal\_value} = \mathtt{withdrawal\_tokens} \cdot \mathtt{bid}_t$
If there is sufficient denomination asset:
1. Burn the claimed fund tokens
2. Update the total supply of tokens: $\mathtt{tokens}_{t+1} = \mathtt{tokens}_t - \mathtt{withdrawal\_tokens}$
3. Transfer the denomination asset back to the investor's wallet
Otherwise, the withdrawal request is put in a request queue, waiting for the fund manager to liquidate assets in the portfolio and exchange for the denomination asset. See for details.

Currently, Avareum supports USDC as the main denomination asset and will soon expand to accept other stable coins.

Liquidation Guideline

Non-investible assets will be liquidated first before all other investible assets. That is, the investible assets can be further liquidated only when the total value of the non-investible assets is insufficient for withdrawal. This design is efficient and preferable for investors because the number of assets to be liquidated is less, if not equal, thus reducing transaction costs at withdrawal.
Assets in their non-investible form are not meant to be invested. Note that an asset that has been claimed to the wallet and has thereby become investible is considered fundamentally different from the non-investible asset that was previously staked, credited, or locked up on a platform. We insist that if the fund manager has an intention to keep these assets, she can and should explicitly state them in the portfolio weight using their investible form. See mental accounting bias for further clarification. Logically, there must exist a market from which the assets can be acquired without unnecessary complexity; otherwise, their strategy-aware definition lacks the pricing method, invalidating the definitions themselves.
Regardless of the withdrawal amount, all of the non-investible assets will be claimed. If the total value of the non-investible assets is less than the withdrawal value, then each of these assets is liquidated proportionally to the current composition weight among the non-investible assets. Otherwise, all of these assets are fully liquidated and the investible assets are subsequently liquidated to fill up the remaining withdrawal amount.
One might suggest claiming and liquidating a minimum subset of non-investible assets whenever possible. While this may reduce the number of liquidated assets a little further, an unfortunate investor might experience unfair transaction costs such as high slippages in illiquid assets, taxes, or uncontrollable factors specific to the selected subset. Proportional liquidation among non-investible assets, as we propose, trades such unexpected risks off with more liquidation transactions and helps fairly distribute the transaction costs in subsequent withdrawal requests once the assets are in the investible form.
Regular or conditional rebalancing is not strictly assumed in our protocol yet encouraged in order to restore the portfolio allocation whenever favorable. Particularly, when the withdrawal value is less than the total value of the non-investible assets, the non-liquidated portion remains in the investible form. The deviation that accumulates by subsequent deposit requests can be resolved by the next rebalance.

The liquidation guideline is a mere suggestion - not intended to be mandatory. Fund managers may reserve the right to follow their own strategies.

$w_1, w_2, ..., w_j$ represent the weights of investible assets
$w_{j+1}, ..., w_k$ represent the weights of claimable non-investible assets
$w_{k+1}, ..., w_n$ represent the weights of locked-up non-investible assets

Also, assume respectively that:

$\mathtt{investible} = \mathtt{nav} \cdot\left( \sum_{i=1}^j w_i \right)$ represents the value of investible assets
$\mathtt{claimable} = \mathtt{nav} \cdot\left( \sum_{i=j+1}^k w_i \right)$ represents the value of claimable non-investible assets
$\mathtt{locked} = \mathtt{nav} \cdot\left( \sum_{i=k+1}^n w_i \right)$ represents the value of locked-up non-investible assets

An investor submits a withdrawal request of value $\mathtt{liquidation\_value}$ , leading to 3 different cases and handlings as follows.

If $0 \lt \mathtt{liquidation\_value} \le \mathtt{claimable}$ : $\Delta w = \dfrac{\mathtt{liquidation\_value}} {\mathtt{claimable}} \cdot [0, 0,...,0, w_{j+1}, ..., w_k, 0, ..., 0]$
If $\mathtt{claimable} \lt \mathtt{liquidation\_value} \le \mathtt{claimable} + \mathtt{investible}$ :\begin{align*} \Delta w &= [0, 0,...,0, w_{j+1}, ..., w_k, 0, ..., 0] \\ &\quad + \dfrac{\mathtt{liquidation\_value}-\mathtt{claimable}}{\mathtt{investible}} \cdot [w_1, w_2,...,w_j, 0, ..., 0] \end{align*}
If $\mathtt{claimable} + \mathtt{investible} \lt \mathtt{liquidation\_value}$ : \begin{align*} \Delta w &= [w_1, w_2,..., w_k, 0, ..., 0] \\ &\quad + \dfrac{\mathtt{liquidation\_value}-\mathtt{claimable}-\mathtt{investible}}{\mathtt{locked}} \cdot [0, 0,...,0, w_{k+1}, ..., w_n] \end{align*} When necessary, a force close shall be applied to unlock the assets, even with additional fees or penalties.

Note that the weight $\Delta w$ represents the liquidation proportion for each asset with respect to the entire portfolio value.