Short Funds Coming Soon

[davos]

(xpost /r/BitcoinStocks)

Hello > Securities >,

I'm presently in the late stages of establishing a series of funds that will allow for the short trading of various securities. My goal is to have the first two fund-pairs filed this weekend or early next week to enable investors and traders direct, in-market access to short positions on BTCT:ASICMINER-PT and BTCT:ACTIVEMINING, which I'm choosing to start with based on their volume.

Each short will consist of a pair of funds, one of which (the lending fund) acts like a pass-through with the additional revenue generated from the lending of securities to the shorting fund. The goal of the short fund will be to achieve a beta between -0.75 and -1.00. Neither fund will use any amount of marginal leverage outside of the cost of lending between them.

This is not a 'virtual' short such as the virtual mining assets that have arisen recently.

The shorting fund will use the sale of shares to create an initial cash position that will serve as collateral against the borrowing of shares from the lending fund. The cash generated from short sales, as well as treasury shares of the short fund, will be utilized to manage the market price of shares should the highest bid/lowest ask cross the threshold of the fund's NPV/share.

The short fund, once listed and being traded, will short and cover shares borrowed from the lending fund - and pay interest on loaned shares equal to 1% of the BTC value of the shares at the time they were borrowed plus any dividends. Management fees will collect a small percentage of the cash position of the short fund and half of the interest paid on shares.

If successfully launched additional short fund-pairs, leveraged ETFs, and index funds will follow.

I appreciate any questions / comments, and if you're holding either ASICMINER-PT or ACTIVEMINING long on BTCT and would be interested in earning some additional return please let me know via PM.

I will attempt to follow this thread and the crosspost on reddit throughout the day while I'm at work, and I will be able to respond more thoroughly to questions and comments after about 9pm UTC.


Such comments or statements as made by "Cryptonomics, SA", "davosBTC" or "davos" should not be read to constitute advice to purchase a security or financial product or as any form of investment advice. Margin trading is only for sophisticated investors and is subject to significant risk of loss.

[MPOE-PR]

(xpost /r/BitcoinStocks)

Hello > Securities >,

I'm presently in the late stages of establishing a series of funds that will allow for the short trading of various securities. My goal is to have the first two fund-pairs filed this weekend or early next week to enable investors and traders direct, in-market access to short positions on BTCT:ASICMINER-PT and BTCT:ACTIVEMINING, which I'm choosing to start with based on their volume.

Each short will consist of a pair of funds, one of which (the lending fund) acts like a pass-through with the additional revenue generated from the lending of securities to the shorting fund. The goal of the short fund will be to achieve a beta between -0.75 and -1.00. Neither fund will use any amount of marginal leverage outside of the cost of lending between them.

This is not a 'virtual' short such as the virtual mining assets that have arisen recently.

The shorting fund will use the sale of shares to create an initial cash position that will serve as collateral against the borrowing of shares from the lending fund. The cash generated from short sales, as well as treasury shares of the short fund, will be utilized to manage the market price of shares should the highest bid/lowest ask cross the threshold of the fund's NPV/share.

The short fund, once listed and being traded, will short and cover shares borrowed from the lending fund - and pay interest on loaned shares equal to 1% of the BTC value of the shares at the time they were borrowed plus any dividends. Management fees will collect a small percentage of the cash position of the short fund and half of the interest paid on shares.

If successfully launched additional short fund-pairs, leveraged ETFs, and index funds will follow.

I appreciate any questions / comments, and if you're holding either ASICMINER-PT or ACTIVEMINING long on BTCT and would be interested in earning some additional return please let me know via PM.

I will attempt to follow this thread and the crosspost on reddit throughout the day while I'm at work, and I will be able to respond more thoroughly to questions and comments after about 9pm UTC.


Such comments or statements as made by "Cryptonomics, SA", "davosBTC" or "davos" should not be read to constitute advice to purchase a security or financial product or as any form of investment advice. Margin trading is only for sophisticated investors and is subject to significant risk of loss.

See here.

[Deprived]

The short fund, once listed and being traded, will short and cover shares borrowed from the lending fund - and pay interest on loaned shares equal to 1% of the BTC value of the shares at the time they were borrowed plus any dividends.

Is that 1% per week, per month, per year?

And is it actually 0.5% if you're taking half the interest as management fee?

EDIT: The devil is always in the details and you haven't provided any.  Basic information is missing such as how and when people can get their shares back.

[davos]

The short fund, once listed and being traded, will short and cover shares borrowed from the lending fund - and pay interest on loaned shares equal to 1% of the BTC value of the shares at the time they were borrowed plus any dividends.

Is that 1% per week, per month, per year?

And is it actually 0.5% if you're taking half the interest as management fee?

EDIT: The devil is always in the details and you haven't provided any.  Basic information is missing such as how and when people can get their shares back.

There are more details on the reddit discussion, but I wanted to handle this as more of a discussion on the subject and provide answers to questions as the prospectus is still being finalized.

The shares will be transferable between the lending-side fund, which will act much like a passthrough fund using the exchange's transfer mechanism and will be processed as the requests are received via email notice. Obviously I have to sleep, but I wouldn't anticipate turnaround taking more than a few hours. I'd be willing to guarantee 12 hour turnaround as sometimes I may be at the bar before I go to sleep (for example).

The benefit to the loan fund is that its shares, being directly convertible to the underlying asset (no fee for transfers in or out) - which are themselves listed on the same exchange - is that you can transfer the shares to the issuer account and receive your underlying assets in response as soon as I can get to it; or, you can just sell the shares of the fund which itself floats on the market.

The benefit of using this pair system is that when the lending account and borrowing account are both managed by the same entity, if the lending fund's ratio falls below the target of shares on deposit versus shares on loan then the management can manually / quickly perform the short squeeze and make the relevant adjustments on both books.

The 1% was basically a stand-in figure for n% that needs to be both low enough to minimize its impact on short traders and high enough that it provides fair compensation to the loan-fund investors. The actual figure will be a superior annual % (probably in the 25%-50% range) that is charged weekly against the shares at their market price at the time they were borrowed by the short fund.

The short fund's assets include the proceeds of the sale of shares, which forms the collateral base of the fund, as well as a separately accounted-for cash balance from the proceeds from short-sales. These proceeds as well as additional collateral shares are utilized to manage the asset price (keeping the NPV within the bid/ask spread), to pay the dividends and fees owed to the lending fund, and it is only against this balance that the fund's own fees will be charged.

The funds will submit to regular audits and will regularly release information. I will not be using outside leverage (other than that provided from the lending fund) and will therefore be obliged to provide consistent updates on the fund's beta - as this system will obviously not allow for a full -1.00, and depending on the volatility of the underlying asset may need to hold collateral at the 150%-200% or more levels which would drop the maximum beta.

Neither fund is without risk, of course. Indeed, investing in the lending fund could actually impact the lender's position on a given asset negatively if the asset price went up too much too quickly. If the fund were observing 200% collateral on loans then if the price were to jump up by 300% overnight (edit: it would have to be effectively overnight as if it happened during business hours I would be able to squeeze the shorts as the price rose. Such moves to the up-side (as these are the only moves that would negatively impact these assets) are not **entirely** unheard of, but as I'm focusing on the highest cap/highest volume securities this potential is somewhat mitigated -again, not eliminated-; but, as the market caps of these securities go up the headline risk to the downside seems just as (if not more) likely than a similar % move-generating event to the up-side. In any case, in the event of a massive upward spike that encroached upon the collateral reserve the short fund would be squeezed out and might need to be liquidated and the loan-fund could potentially drop below a 1:1 reserve ratio). It is for this reason that I anticipate re-investing a portion of the interest fees collected back into reserve shares to improve the ratio - although I want to avoid doing this unless I cannot think of a way around it, as it is not the intent of either fund to create either a short or long position on any security - but to allow for others to participate in a short position if they so choose or earn some interest on their long positions. The interest rates charged on loans will need to be sufficient for investors to accept the risk, and likely will need to be adjustable.

See here.

Valuable advice, which I enjoyed very much when I first read it months ago.

I have never had any interest in wasting my own time or money, or the time and money of others and don't expect this to do either. This is not a formal prospectus because I am soliciting feedback and discussion.

I have responded to some questions on the reddit post which may help elucidate the conceptual ideas behind these funds. Questions are encouraged.



second edit: Nowhere have I, or would I suggest that there is not serious financial risk taken on by short traders - and that there is not significant (but less) risk taken on by lenders. I am not discussing this as a way to make everyone wealthy - people are guaranteed to lose money short trading without knowing what they're doing. That said, I believe the benefits to the market and to people who do know what they're doing are significant enough for me to proceed.

[MPOE-PR]

I have responded to some questions on the reddit post

I have responded to some questions on the reddit post

reddit

[davos]

I have responded to some questions on the reddit post

I have responded to some questions on the reddit post

reddit

Repeating yourself like that makes it seem as though you think you've made a point.

[MPOE-PR]

Repeating yourself like that makes it seem as though you think you've made a point.

I was just trying to speak teh redditard language. Excuse me if I'm not too good at it, it's foreign to me, at the very least you could appreciate my trying to accommodate your needs!

Here's a plainer version: you have to be fucking mentally ill to imagine reddit is a platform for anything other than retarded trolling. What's the future here, after your reddit finance thing you're going to do a 4chan dating thing?

[stslimited]

MPOE continuing the long tradition of stifling bitcoin commerce while completely failing to stop actual scams

[davos]

Repeating yourself like that makes it seem as though you think you've made a point.

I was just trying to speak teh redditard language. Excuse me if I'm not too good at it, it's foreign to me, at the very least you could appreciate my trying to accommodate your needs!

Here's a plainer version: you have to be fucking mentally ill to imagine reddit is a platform for anything other than retarded trolling. What's the future here, after your reddit finance thing you're going to do a 4chan dating thing?

Reddit has its uses, as does BTCTalk. I've been on Reddit longer than I've been here, but (hopefully without sounding too defensive) will point out that I effectively cross-posted this between both platforms... even so, I prefer threaded comments and find up/down votes to be decently useful in helping me find what's worth reading.

And yet here I am. I probably should have approached this thread a bit differently, and will do so when I make a more formal introduction to the program (as opposed to this thread, which is effectively a toe in the water). I have a handful of active projects, and a handful of projects in development - of which this is one. Whether I am operating a short fund - or someone else is - a healthy securities market requires a level of broad access to shorting to achieve the kind of efficiency our markets desperately need.

In one comment in this thread I've laid out a bit of how this would work, and I'll be following it up with a more comprehensive document later this week or next weekend - and if nobody else steps up to do it my way (or a better way that could also work) I'll proceed with the filings... because the markets need them.

I understand the trust issues involved, which means I'll likely need to build not just persistent auditing (already included) but likely 2-of-3 access for the cold storage wallets (which I'd not initially thought of, but which your skepticism has reminded me is probably necessary at some level).

Even with such controls, however, there is nothing but trust at the end of the day, and whomever operates such a security will need some of that... the risk that I or any asset manager will just run off with the money is a risk that every asset (including yours) will always have. It is a risk that needs to be priced in to every investment we make. This isn't exclusive to the bitcoin world by any means - but it is a somewhat larger factor than it would be in highly controlled and regulated public markets.

[MPOE-PR]

MPOE continuing the long tradition of stifling bitcoin commerce while completely failing to stop actual scams

A bunch of HYIP retards aren't "commerce". My line isn't stopping scams, my line is labeling scams. And HYIP retards.

[davos]

MPOE continuing the long tradition of stifling bitcoin commerce while completely failing to stop actual scams

A bunch of HYIP retards aren't "commerce". My line isn't stopping scams, my line is labeling scams. And HYIP retards.

There's an argument to be made that a rational price of a steady dividend paying asset in the bitcoin markets should appear like a HYIP.

People pricing securities even to a 1-year P:E are probably overpricing them by under-estimating the various headline, regulatory, competitive, and trust risks - among likely others.

The fact that many (perhaps most) of the securities being traded are issuing near-100% of their profit as dividends is somewhat telling of this fact, although it's still a bit troubling that many of these securities are trading with P/E ratios and Yields of established corporations in the fiat markets - which doesn't reflect the various risks involved as well as might be desired.

A short fund would help this a great deal - as there are likely intelligent people watching these markets for a good opportunity - but are avoiding investing in most or all of the issues available because they find most or all of them overpriced against the risk.

[MPOE-PR]

MPOE continuing the long tradition of stifling bitcoin commerce while completely failing to stop actual scams

A bunch of HYIP retards aren't "commerce". My line isn't stopping scams, my line is labeling scams. And HYIP retards.

There's an argument to be made that a rational price of a steady dividend paying asset in the bitcoin markets should appear like a HYIP.

People pricing securities even to a 1-year P:E are probably overpricing them by under-estimating the various headline, regulatory, competitive, and trust risks - among likely others.

The fact that many (perhaps most) of the securities being traded are issuing near-100% of their profit as dividends is somewhat telling of this fact, although it's still a bit troubling that many of these securities are trading with P/E ratios and Yields of established corporations in the fiat markets - which doesn't reflect the various risks involved as well as might be desired.

A short fund would help this a great deal - as there are likely intelligent people watching these markets for a good opportunity - but are avoiding investing in most or all of the issues available because they find most or all of them overpriced against the risk.

Everything listed on MPEx always was and still remains open to shorting. See here.

[davos]

Everything listed on MPEx always was and still remains open to shorting. See here.

Indeed, this is a laudable service - but not one that does people looking to short ACTIVEMINING or ASICMINER or, for that matter any mining "stock" a damned bit of good... let alone many of the funds and other companies that seem to be hitting the markets more than once per week as of late.


edit: I should add - it's not just about the existence of the opportunity. The opportunity to short already exists OTC, and always has. That doesn't mean it has been very well exploited other than by those who are willing/able to go through those extra steps. The idea behind the paired funds is that it provides a matchmaking service between long-holders interested in earning something on top of their dividends and capital gains - and short sellers willing to put down collateral and pay interest on the borrowed shares.

Such a service - regardless of who operates it - is a sort of dedicated escrow to a specific transaction type: facilitating the lending and borrowing of shares. Realistically such a service could be entirely automated - and it would probably be more effective if it were. That would be something I would look into (were I running such assets) after a period of time - depending on what sort of volume the early funds saw in that regard.

[gog1]

I see that you mention the shortfund will be traded (obviously), how about the lending fund?

[davos]

I see that you mention the shortfund will be traded (obviously), how about the lending fund?

The only practical way to maintain liquidity for investors in the lending fund will be for it to float on the market in addition to the short fund. My thinking is that it would act as a 1:1 fund, where 1 share of the lending fund can be freely exchanged using the platform's transfer mechanism for 1 share of the underlying asset. However, as with all pass-through type funds, the immediacy of this would be somewhat in question - especially seeing as the fund wouldn't literally hold 1:1 in backing.

The lending fund's assets would be both directly held backing shares as well as notes equivalent for shares lent to the shorting fund. It's income would be from the dividends paid to the held-backing shares as well as the interest and fees (equal to dividends that would have been paid to the lent shares) on the shares that were lent to the shorting fund.

The goal would really be to maintain an interest rate on lent shares that allowed compensation to the investors in the lending fund in excess of their risk, inclusive of fees - so in an ideal environment the market price of the lending shares would be equal or slightly higher than the market price of the underlying security.

My thinking is that eventually this will all be automated - and frankly it might serve as a simple proof of concept for the platform operators (burnside, ukyo, etc) to write a similar function into the markets themselves. If they don't do that, of course, I'll need to script the process of management of these assets, as I doubt I'd be able to balance my other responsibilities against operating similar funds for all assets on the market.

Alternatively, by sharing the administrative protocols being used others may likewise set up similar funds to provide shorting to more long-tail assets on the markets.

[Technologov]

Problem : a 500% overnight spike in Bitcoin stocks is likely to occur.

I would be scared to loan my Active Mining stocks without proper collateral. (200% will fail, but at 1000% we limit speculative profit)

-Technologov

[davos]

Problem : a 500% overnight spike in Bitcoin stocks is likely to occur.

I would be scared to loan my Active Mining stocks without proper collateral. (200% will fail, but at 1000% we limit speculative profit)

-Technologov

A 500% overnight spike is the harshest possibility to be sure, and it is the risk that the interest rate the lending fund charges the shorting fund must primarily be concerned with. Lenders must be compensated for their risk.

The real risk in this is, of course, that a manually managed short fund cannot be guaranteed to effectively squeeze the shorts in the event of a massive price-spike. I think we need this sort of element in the marketplace, but I don't think it wise for people to invest their entire portfolio in such a fund - as risk can only be managed so far in the face of potential massive price spikes.

Some of this is accommodated by the fact that the lending fund is a 1:1 passthrough - so as long as the price spike remains under the ability of the shorting fund to repurchase shares (including deployment of collateral BTC) then the Lending Fund will be able to maintain its 1:1 backing.

Over-night doubles aren't uncommon. I think the odd triple here and there has happened. There are not many five-baggers to be found in our history - at least in such a short window. This is why I'm targeting the deeper assets to begin with (Asicminer and Activemining) - they are more liquid and have a higher cap than most other traded stocks. I could, alternatively, just start with Asicminer - as the necessary event to drive a double on that would be much. It would take a lot more for ASICMINER to double overnight than it would for, say, BASIC-MINING to.

To accommodate this, market-average, market-outlier, and asset-specific price volatility will be included in the calculation of the interest rate charged on loaned shares. I will/would also be including this information as well as trading volumes in the calculation of the reserve-ratios required both for reserve shares in the lending accounts as well as the collateral backing of shares on loan for the shorting account - in addition to other factors including the fee schedule.

In an ideal world I wouldn't do this at all, as someone already would have; or, the market-operators themselves would have coded the feature into the platforms directly (they'd actually be able to offer this service much more cheaply and securely than any asset issuer could). As MPOE-PR reminded me in a previous comment here, MPEX offers shorting - but only really because MP is the owner or co-owner of all of the stocks traded there and is 'long' all of his own assets and is therefore willing to lend them to anyone to short... and even then it remains effectively an OTC trade.

I should probably add in every comment I make in this thread that: Trading on margin is a sophisticated investment strategy and may result in lower returns and/or significant risk of losses. No guaranteed return on investment, or guaranteed protection against loss can or should be made or trusted.

That doesn't mean the markets don't need such investment options.

[DrGregMulhauser]

I'm having some trouble understanding exactly what you're proposing, mainly because if I've understood correctly what you've described so far, what you've described has very little to do with how inverse ETFs work in the outside world.

Generally speaking, inverse ETFs approximate the inverse of whatever the underlying entity might be over the course of a single trading day. In addition, typically they don't rely solely on the blunt instrument of just shorting the underlying entity for that day and rely instead on a mix of derivatives and shorting. And they necessarily rebalance every single day, usually near the end of the day. (If they did not, they would no longer be able to deliver daily inverse performance. To avoid performance drifting wildly away from the target, delivering inverse performance requires specifying a starting time and an ending time, with corresponding rebalancing.)

Can you say any more about how what you're describing would match up with the expectations that ordinary investors would have of how an inverse fund like this would work, how actually running one manually would work, and whether you have some other time period in mind besides a single day?

[MPOE-PR]

Everything listed on MPEx always was and still remains open to shorting. See here.

Indeed, this is a laudable service - but not one that does people looking to short ACTIVEMINING or ASICMINER or, for that matter any mining "stock" a damned bit of good... let alone many of the funds and other companies that seem to be hitting the markets more than once per week as of late.


edit: I should add - it's not just about the existence of the opportunity. The opportunity to short already exists OTC, and always has. That doesn't mean it has been very well exploited other than by those who are willing/able to go through those extra steps. The idea behind the paired funds is that it provides a matchmaking service between long-holders interested in earning something on top of their dividends and capital gains - and short sellers willing to put down collateral and pay interest on the borrowed shares.

Such a service - regardless of who operates it - is a sort of dedicated escrow to a specific transaction type: facilitating the lending and borrowing of shares. Realistically such a service could be entirely automated - and it would probably be more effective if it were. That would be something I would look into (were I running such assets) after a period of time - depending on what sort of volume the early funds saw in that regard.

Yeah. Well, originally (ie, last year) MP had both synthetic assets to short the GLBSE mining scams and actual PTs to allow for more balanced trade. It did nothing of any practical value and so it was discontinued. This may be instructive further reading.