A case for Hedge Funds combining a Reg D Token offering in their capital raising mix
Traditionally, Hedge Funds raise capital via networks of wealthy family offices and Institutional Investors. Over the economic bust boom cycles most hedge funds suffer from undue redemption and withdrawal notices from even their best investor partners due to the investors need for liquidity to fund other commitments and rebalance their portfolios. Even good/uncorrelated absolute returns do not protect most funds from these vicious cycles.
How are Funds battling this phenomenon?
1: if they are in strong demand, they are creating various sub offerings where they trade liquidity terms for a fee concession or for access to their liquidity constrained strategies for alongside investments into the main fund with slower/reduced liquidity terms.
2: if they are not in strong demand, they suffer like a cash card on black Friday, often forcing a Fund to get their Board of Directors to impose a gate or freeze on withdrawals/redemptions. Unfortunately, extreme measures become a permanent part of a Funds history which now appears in their Due Diligence responses, and can damage Managers reputation.
Is there a better way to inexpensively raise permanent capital?
Similar to listing a company on an exchange in a public offering, a private Fund Manager can include creating a token for a portion of their capital raising mix.
Just like a traditional Feeder Fund, a Manager can create a Tokenized Feeder or multiple Tokenized Feeders into their Master. What problems does this solve? Firstly, it provides the Manager with certainty in at least a portion of their AUM.
The Manager can make the Tokenized Feeder either a closed end Fund locking up the capital for a finite period many years out, or an open-ended Fund providing a form of permanent capital to the manager, not redeemed until the Manager or the Board of Directors decides to wind down the Fund based not on market gyrations or changes in returns, but because of the business decisions of the Manager.
Obviously, the Tokenized Feeders Operating Agreement (Onshore) or Memorandum and Articles of Incorporation (Offshore Corporation) would spell out specific terms and responsibilities.
Secondly by Tokenizing the Feeder, there is potential for 24/7 liquidity in the Tokens. Buyers and Sellers meet on what is called a DEX to transact in the Feeder’s Tokens. This feature not only can provide the liquidity investors want, but also provide some intriguing other opportunities.
It is obvious that the Token should trade on the DEX in relation to the NAV of the Tokenized Fund divided by the number of Tokens outstanding.
But, are there other opportunities? What about a scenario similar to 2008 where investors need liquidity?
Tokens may trade at a significant discount to NAV as investors seek to raise liquidity, providing a buying opportunity for the Manager to buy up their own Fund, for investors seeking to get a discount to invest with the manager, and for arbitrageurs to take advantage of a deal. Similarly, if Tokens were to trade at a premium here is an opportunity for an investor to rebalance their portfolio.
Tokens also provide the option to in a democratic way return capital, pay dividends,wind down a Fund, enforce regulatory criteria, and share information with investors. All through the Blockchain.
So why aren’t more Hedge Funds using this new, inexpensive access to permanent capital? It seems the traditional capital introduction groups are not yet embracing this new technology, they have not partnered with the Defi/Blockchain/Tokenizing firms, both internal business development personnel and external capital introduction groups continue to sell Fund Managers on the “high-touch” /relationship method of raising capital which is their strength.
But this ignores the benefits of including Tokens as a part of the Capital Raising plans.
We at Tokenizer see Tokenization having a rapid embracement of adding Tokens to the capital raising mix of Funds.
Funds will during Due Diligence share with investors what percentage of their capital base is permanent. Fund managers will realize that the bigger the share of permanent capital the smaller their headache during stressful times.
Innovative Capital Introduction and Business Development staff will add the concept of Tokens to upcoming raises and build permanent capital into their models.