The world of DeFi is constantly evolving and growing. With new projects and protocols being introduced all the time, it can be challenging to keep up with the latest trends and opportunities in the space. That’s where DeFi funds come in. By investing in a DeFi fund, you can gain exposure to a diversified portfolio of DeFi investments without having to pick individual projects yourself.
But with so many DeFi funds available, how do you choose the right one? In this article, we’ll explore what to look out for when investing in a DeFi fund and provide some tips to help you make an informed decision.
The DeFi Fund Landscape
Before diving into what to look out for when investing in a DeFi fund, let’s take a look at the current landscape of the DeFi fund market. According to a report by PwC and Elwood Asset Management, the assets under management (AUM) of DeFi funds have grown significantly over the past year.
As of December 2020, the AUM of DeFi funds was $650 million, up from $21 million in January 2019. The report also noted that the number of DeFi funds has increased from just one in 2018 to over 100 in 2020.
This growth can be attributed to the explosive growth of the DeFi ecosystem as a whole. As of April 2023, the total value locked (TVL) in DeFi protocols has reached over $300 billion, up from just $1 billion in mid-2020, according to DeFi Pulse.
With this rapid growth comes increased interest and attention from investors looking to gain exposure to DeFi. Let’s take a look at what to consider when evaluating a DeFi fund.
What to Look Out for When Investing in a DeFi Fund
Fund Manager’s Track Record
The first thing to consider when investing in a DeFi fund is the fund manager’s track record. The fund manager should have a proven track record of successfully managing DeFi investments. You should also research the fund manager’s background and experience in the DeFi space.
Look for a fund manager who has experience in both traditional finance and DeFi. This will ensure that the manager has a good understanding of both worlds and can make informed investment decisions.
The Fund’s Investment Strategy
You should also carefully evaluate the fund’s investment strategy. The fund’s investment strategy should align with your investment goals and risk tolerance. Some funds may be focused on generating income through lending, while others may focus on investing in new and emerging DeFi projects.
Consider the fund’s investment thesis and strategy. Does it invest in a broad range of DeFi protocols, or does it focus on specific sectors, such as decentralized exchanges or lending protocols? Does it invest in established projects or emerging ones? Understanding the fund’s strategy will help you determine if it aligns with your investment goals.
Transparency is key when investing in a DeFi fund. The fund should provide regular updates on its investments, holdings, and performance. You should also be able to easily access information about the fund’s fees, management structure, and other relevant details.
Look for a fund that provides regular updates on its performance and holdings. This will help you stay informed about the fund’s progress and ensure that it’s meeting your expectations.
DeFi investments are inherently risky, so it’s important to ensure that the fund has adequate security measures in place. The fund should have robust security protocols to protect against hacks and other cyber threats.
Ask the fund manager about the fund’s security measures. Does it use cold storage to store its assets? Does it have a team dedicated to monitoring and addressing security threats? Understanding the fund’s security measures will help you evaluate the risks associated with investing in the fund.
Finally, you should carefully evaluate the fees associated with investing in a DeFi fund. Some funds may charge high fees, which can significantly impact your returns. Be sure to understand the fees associated with investing in the fund, including management fees, performance fees, and other expenses.
Look for a fund that has transparent and reasonable fees. You should be able to easily find information about the fees associated with investing in the fund. Be wary of funds that have high management fees or other hidden fees that can eat into your returns.
Investing in a DeFi Fund: A Case Study
To better understand what to look out for when investing in a DeFi fund, let’s take a look at a case study.
The DeFi Pulse Index (DPI) is a popular DeFi index fund that tracks the performance of the top DeFi protocols. The DPI is managed by Index Coop, a decentralized autonomous organization (DAO) that aims to create and manage index products for the DeFi ecosystem.
Let’s evaluate the DPI using the criteria we’ve discussed.
Fund Manager’s Track Record
Index Coop is a relatively new player in the DeFi space, but it has quickly gained a reputation for innovation and community-driven governance. The team behind Index Coop has experience in both traditional finance and DeFi, and they are committed to transparency and community involvement.
The Fund’s Investment Strategy
The DPI is designed to track the performance of the top DeFi protocols, providing investors with exposure to a diversified portfolio of DeFi investments. The fund is rebalanced every month to ensure that it remains aligned with its investment thesis.
Index Coop is committed to transparency and community involvement. The team provides regular updates on the DPI’s performance, holdings, and rebalancing activities. They also encourage community members to provide feedback and suggestions for the fund.
The DPI’s assets are stored in a multisignature cold wallet, which requires multiple signatures to access. Index Coop also has a team dedicated to monitoring and addressing security threats.
The DPI has a management fee of 0.95%, which is lower than many other DeFi funds. The fund also has transparent and reasonable fees for other expenses, such as gas fees and rebalancing expenses.
Overall, the DPI is a well-managed and transparent DeFi fund that provides investors with exposure to a diversified portfolio of DeFi investments. By evaluating the DPI using the criteria we’ve discussed, we can see that it meets the standards of a quality DeFi fund.