Fund Subscription

Mechanism

Avareum Fund Subscription

To start investing in Avareum's funds, an investor connects her wallet to Avareum's protocol and provides the subscription details such as an investment fund of interest, the unit of the denomination, and the amount to invest. After the investor has confirmed the subscription request, the smart contract begins the following process:

1. Verify basic qualifications, including but not limited to:

   1. Whitelisted, if applicable, and not blacklisted

   2. Sufficient amount of the denomination asset in the wallet

   3. Exceeding the minimum amount of funds

2. Put the request in the queue with the denomination asset transferred from the investor's wallet. Wait to proceed when the system is ready.

3. Calculate and mint fund tokens that are used to charge fees for existing investors:

   1. Calculate management fee and mint fee token to the management fee vault (MFV)

   2. Calculate performance fee and mint fee token to the performance fee vault (PFV)

4. Calculate: $\mathtt{nav}_t =$ the net asset value before the fund is deposited (pre-execution) $\mathtt{tokens}_t =$ the token supply, including the 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

5. Calculate and create fund tokens for the new investor.

   1. Let $\mathtt{deposit\_fund} \ge 0$ be the actual amount of deposited fund in the denomination asset. The investor will receive her fund tokens in the following amount: $\mathtt{deposit\_tokens} = \dfrac{\mathtt{deposit\_fund}}{\mathtt{ask}_t}$

   2. The total supply of fund tokens is then updated: $\mathtt{tokens}_{t+1} = \mathtt{tokens}_t + \mathtt{deposit\_tokens}$

6. Transfer the fund tokens back to the investor's wallet.

7. Following the investment schedule, the fund manager will allocate the deposited fund proportionally to the current portfolio weight. See Allocation Guideline for details.

Note that when another fund operation is being processed, subscription requests will be put in a queue, which may require some waiting time. Once the fund tokens are successfully created, they will be returned to the investor's wallet automatically. Our web portal will keep the investor updated with the current subscription status.

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

Allocation Guideline

Following the traditional allocation procedure, the new fund deposited by an investor is allocated proportionally to the current portfolio weight, although being different from the target portfolio weight. That is, the current portfolio weight is to be maintained at deposit. This design is justified for a couple of reasons:

1. No rebalancing should be triggered at deposit since the investor has to bear all the transaction costs. It is unfair for the investor to be responsible for the cost of rebalancing the entire, or even partial, portfolio.

2. Also, attempts to use just the newly deposited fund to partially restore the current portfolio back to the previous target weight require several assumptions about the investment strategies, which may not generalize. For example, the current allocation might already be converging to the new target weight of the fund manager's interest, consequently disqualifying the previous target weight.

3. It is safe to assume that the current allocation lies within an acceptable deviation range. If the current weight had been intolerable, the fund manager would have already triggered a rebalance.

There are cases in which the allocation procedure discussed above is not achievable. We identify and address all the cases below:

1. The first amount of fund deposited has no portfolio weight to be used as a reference. In this case, the deposited fund will be fully allocated in the denomination asset. The first rebalance triggered by the fund manager will align the portfolio to the target weight.

2. Some assets, as designed to be strategy-aware, are not investible and, therefore, do not have an entry action. This includes, for example, staking credits, airdrops, locked-up assets. In which case, the deposited fund will be allocated proportionally only to the weight of the investible assets, excluding the non-investible ones.

   One might suggest that harvesting the non-investible assets before allocating the fund can also solve the problem. This, however, forces the investor to pay for the transaction costs of partially rebalancing the portfolio. Another possibility is to leave the portion of the non-investible assets in the denomination asset. This is similar to the case where the portion of the allocated fund does not meet the minimum requirement of the asset's entry-strategy action. While this simplifies the allocation procedure, it reduces capital utilization, thereby lowering fund performance.

3. Short-selling positions introduce at least 2 additional constraints not found in long-only portfolios. First, short selling adds to the portfolio the proceeds of value equal to the debt position in return for selling the asset. However, when the market price changes, the value of the debt position also changes irrespectively to the value of the proceeds. Since the ratio of the proceeds introduced by opening a short-selling position is fixed, maintaining the current portfolio weight is hardly achievable. Second, short selling requires collateral and over-collateralization is unfortunately common in decentralized finance. Directly applying the current portfolio weight will result in an insufficient collateral level. In this case, the new portfolio weight after allocating the deposited fund will inevitably deviate from the current portfolio weight. Since it is crucial to maintain the portfolio weights e.g. to preserve hedging ratios, we allocate the deposited fund, excluding the forthcoming proceeds, with respect to the current portfolio weight that is scaled down to allow over-collateralization.

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

To summarize, let $w=[w_1, w_2,...,w_k, w_{k+1}, ..., w_n]$ be the current portfolio weight. We have $w_i > 0$ since long and short positions on the same underlying asset should differ in their indices thanks to the strategy-aware definition.

Assume that $w_1, w_2, ..., w_k$ represent the weights of investible assets and $w_{k+1}, ..., w_n$ the weights of non-investible assets. Let $\kappa_i$ be the current collateral ratio for position $i$. Unlike those on centralized exchanges, short-selling positions are individually over-collateralized and without the need for an initial margin requirement. Let $\kappa_i = 1$ for long positions and $\kappa_i > 1$ for short positions (over-collateral). The deposited fund will then be allocated using the following adjusted weight:

$$\Delta w= \dfrac{1}{\sum_{i=1}^k \kappa_i w_i} \, \Big [w_1, w_2,...,w_k, 0, ..., 0 \Big ]$$

Note that the weight $\Delta w$ represents the exposure of the newly deposited fund and may not sum to one. The remaining will automatically be used as collateral in short positions. To ensure that the adjusted portfolio weight works in all scenarios, e.g. sufficient collateral is guaranteed for debt positions, it is essential to prove mathematically that the weight satisfies all the constraints given above. The proof is, however, left to the investors as exercise.

Note also that the current protocol design and development allows short-selling positions to be opened separately also with their collateral separately maintained i.e. no cross collateral. To efficiently manage this, if a short position already exists for an asset of interest, position adjustment, e.g. exposure and collateral, will be performed instead of opening a new short selling position. Thus, the fund portfolio should consistently maintains one short position per asset.