Avantgarde Finance: Update
Building an On-Chain Fund Management Platform
Updating the story from July, 2020
Last summer, CoinShares Ventures announced an investment in Avantgarde Finance, a company that aims to democratize and disintermediate investment fund administration.
By the time we invested, we’d already known the CEO, Mona el Isa, for more than four years (a lifetime in crypto!) and had closely followed her progress, initially as CEO of Melonport, building on what was originally Melon (now rebranded Enzyme, though the token is still $MLN) and now with Avantgarde. Prior to crypto, Mona was at Goldman Sachs and raised her own hedge fund — two experiences that shaped her vision for disruption of initially the fund management vertical but ultimately a much broader domain.
Traditional Fund Management is Broken
Before we look at the broader opportunity, let’s take a quick look at the fund management space. After two decades in the industry, I feel qualified to state that it’s ripe for disruption. From GPs, LPs, SPVs, SPCs, partnership agreements, to subscription documents that run to dozens of pages and auditors and administrators that can cost $25k-$50k per year for very plain vanilla work — the fund management landscape is a terrifying patchwork that has developed because basically, humans are not all that trustworthy.
Bad actors (think Bernie Madoff, Amaranth or Beacon Hill) have over the years discovered a great many ways to do bad things that end up costing investors money. So, fund managers and LPs end up spending lots of time and money to address trust (or rather the lack of it).
Investors — the people who put money into funds — rely on administrators to help them answer these questions:
- Is their money safe?
- Is the manager doing what they said they would do?
- Are the fees being charged correctly?
- Are risk & performance in line with expectations?
When we first started talking to Mona and her team, this seemed like exactly the sort of problem that blockchain protocols and smart contracts were designed to solve.
The second order problem is that all this complexity costs money and creates a barrier to entry to new managers, especially those without an existing track record or blue-chip pedigree. While there are many efforts to connect investors with emerging managers, the data doesn’t lie.
Most investment capital flows to a small number of large funds, leaving a long tail of sub-scale emerging managers.
This problem is especially acute for crypto funds. Although we estimate there to be perhaps $10B AuM managed by crypto funds, excluding venture funds — plus over $50B in structured products such as CoinShares’ own ETPs, the median fund size for an actively managed crypto strategy is still under $10M. The majority of actively-managed non-venture AUM is concentrated in a small number of funds.
Typical setup costs for a crypto fund are upwards of $100k and when you add in the complexities of accounting and compliance for trading cryptocurrencies and tokens, you could be looking at an additional $100k in fees over the life of the fund. This is simply not economically viable for an emerging manager raising a first or second fund.
GPs (the people running funds) and LPs (the people investing in funds) both lose. Too much money gets sucked out by administrators, legal, auditors, and other intermediaries instead of being deployed to generate alpha. Moreover, managers spend too much time and energy on administration rather than the investment strategy itself.
Introducing Enzyme Vaults
Enzyme is an open-source protocol which enables the set up and management of digital investment “vaults” on-chain whilst also providing easy investor access to them. Avantgarde is a platform operating on top of the Enzyme Protocol aimed at greatly improving efficiency & reducing costs in this business.
To create an Enzyme Vault costs around $150 right now.
Investors can be assured that the pooled digital assets in a Vault will be managed and administered exactly as specified in the set-up of the on-chain investment vehicle, and can track the net asset value (NAV) of the portfolio in real time.
The number of vaults built using Enzyme has been growing. You can see the managers on the platform here.
The Avantgarde mission is to create a platform that allows managers and their investors to focus purely on investing. This enables Avantgarde to showcase emerging managers and a wide range of opportunities to investors, and provides a cost-efficient, highly scalable middle & back office for asset managers.
The Avantgarde platform solves a number of problems, including:
- Enables asset managers and sponsors to create their own tokenized investment vehicles (the “Vaults”)
- Allows managers to define and customise key parameters such as fee structure, trading exchanges, asset universe, risk management, investor whitelisting and more
- Provides easy access for investors to discover and invest in talented managers
- Automates typical back and middle office processes through smart contracts
- Calculates daily NAV, fees and enforces rules by smart-contract
Avantgarde will play a critical role in nurturing and fostering the growth of the emerging manager landscape by providing them with tools, introductions and opportunities which will help them gain visibility, track-record and growth.
Our Investment Thesis
As a team who has built and operated several traditional investment funds, including those under the banner of CoinShares Ventures, we saw the potential of Avantgarde to transform our own business.
We believe Avantgarde will do for start-up investment managers and their investors what AngelList at did for start-up founders and their investors. Rather than just covering equity investments, Avantgarde has the flexibility to include a wide range of assets represented as tokens or smart contracts. Indeed, as you’ll see towards the end of this piece, the UX now covers a very wide array of asset types, enabling all sorts of interesting strategies.
CoinShares is not just an investment firm, but a firm using technology to evolve how investing works, so Avantgarde was the perfect place for us to apply our extensive experience to build new products and services in collaboration with the Avantgarde team.
One important area of focus is creating products that can be marketed and distributed under the same regulatory perimeter as traditional funds, or perhaps even under more permissive regulatory guidance, given the added level of transparency provided through on-chain management.
Since last summer, Avantgarde has focused on driving adoption of the Enzyme protocol & thus Total Value Locked in Vaults by attracting more investors and managers to the platform. This is obviously a numbers game where LPs & GPs have other options — and it thus required the company to invest in UX enhancements to the basic open source layer. What’s been achieved so far with v2 (which was deployed earlier this year) is impressive. Various improvement proposals were implemented to reduce hurdles to adoption.
- Up-front costs for Vault creation have been cut, and set up is now one process instead of several.
- Slicker UX.
- Lending now available. This allows credit funds to be managed on-chain using Avantgarde.
- It’s now possible for Vaults to contribute to Uniswap liquidity pools, with other pools like Balancer being added soon.
- Some assets can be staked, and again more will be added soon.
- Farming is available via the Rewards section of the app.
Right now Enzyme Terminal is fully DeFi — so the range of tokens that can be traded is limited to those on which it’s possible to find a quote either via a liquidity pool or through a market-maker. Currently it’s limited to ERC-20 tokens, but over time, more tokens will be added — and since everything is being tokenized, eventually a wide universe of assets should be accessible. Already the range of tokens is pretty extensive (around 200 at time of writing). With all the new functionality that’s available we believe it’s possible for managers to run an impressive array of strategies on Avantgarde’s platform:
- Long-only (original use-case)
- Passive (such as the DeFi equivalent of Index ETFs)
- Long/short strategies (with the use of the Synthetix adapter)
- Yield farming
- AI-based approaches
Mona wrote a great piece on the challenges of liquidity provision on DEXs, with one key takeaway being that more market-makers are needed. The folks at Messari also wrote a great piece on this subject recently. Whilst liquidity on DEXs has improved substantially over the past year, they’re still not a perfect venue for execution — especially when there’s a lot going on and gas prices spike.
One of the issues that concerned us in the past was that in the DeFi space, if you’re a regulated financial institution, fulfilling the anti-money laundering requirements is pretty hard. While we haven’t seen any DEXs announce officially that they’re addressing this, functionality now exists (such as that created by another CoinShares portfolio company, Coinfirm) that will allow various types of AML check to occur and thus work to facilitate broader institutional adoption. We believe at least one DEX is likely to adopt this tech soon, thus removing one more barrier to wider adoption of DeFi products.
As crypto asset management continues its march into mainstream asset management, Avantgarde will be a great partner for traditional funds and administrators looking to diversify into crypto to use the company’s technology to reduce costs and drive efficiency. As everything becomes tokenized, we see opportunities for Avantgarde to expand beyond crypto managers.
As the age of the institution evolves to the age of the influencer, Avantgarde will democratize the fund industry.
Disclosure: The author of this piece owns MLN tokens in his personal portfolio.