YIP: Investment Portfolio Strategy Polling / Voting

YAM Investment Portfolio Update #1 – Voting for Investment Strategy

11/8/2020
by @feddas

Portfolio Overview
This is update #1, for additional information and Investment Thesis / Strategy see original thread here:


This update will be describing the upcoming necessary governance votes that will need to be approved by the community for operating the YAM Token Set that @Krugman is currently building. @Krugman is customizing a Token Set specifically for Yam governance and investment portfolio. Soft target for completion is 12/8/2020.

Governance

While the Yam Token Set in construction, there are a few guardrails Yam Governance needs to decide on:

  • Investment strategy from Conservative to Aggressive
  • Portfolio Set Director and Portfolio Communications Director

Investment strategy from Conservative(1) to Aggressive(5)

Yam Investment Portfolio will be determined by a scale from 1 to 5 from conservative to aggressive. This will allow Yam to give guidance to the Set Manager on how much risk to reward he should target. The individual investments that the Set Manager makes will be up to his discretion but will follow these guidelines. The scale will define the beta and correlation of the portfolio which determines systematic risk. The correlation coefficient allows us to determine how much in sync are the movements of asset vs ETH, but it does not measure the volatility like Beta does. Beta is a statistical measure of the volatility of a stock versus the overall market (ETH in our case):

  • A beta above 1 means a stock is more volatile than the Ethereum.
  • A beta below 1 means a stock is less volatile than the Ethereum.

Using both of these as guardrails allows the Set Manager to invest based on risk tolerance.

Here’s a sample from @Krugman (#2 AUM currently in Tokenset.com for his own set):

Link to @Krugman’s Excel File:

For Yam’s Purposes, Here is our scale of 1-5:

TechnicalDef

Here’s an example portfolio would look like:

Currently our portfolio consists of multiple strategies utilizing different decentralized finance strategies:

  • Liquidity Pool Farming Yield – This strategy provides income when assets are staked at an Automated Market Maker such as UNISwap.io then staked again at a yield farm to gain additional income.
    • AMM staking gains fees from parties swapping assets but it is subject to Impermeant Loss.
    • Staking AMM tokens at a yield farm generates additional tokens (usually the farm’s token) but these tokens can be sold for additional income or held.
  • Tokenset Index Fund - Defi Pulse Index https://www.tokensets.com/portfolio/dpi
    • The DeFi Pulse Index is a capitalization-weighted index that tracks the performance of decentralized financial assets across the market.
  • Yielding Stablecoins – Stable coins that can be invested to return income.
    • Yielding Stablecoin pools benefit users by socializing gas costs, automating the yield generation and rebalancing process, and automatically shifting capital as opportunities arise.

What we need to vote on is how conservative (1) or aggressive (5) we would like the portfolio. Remember this is not your personal portfolio. Your vote will guide how well the YAM treasury does, and in turn likely how YAM Token does. For more information about portfolio development see my thread:

The poll is from 1 (Conservative) to 5 (Aggressive). Select as many choices as you would like, highest votes will be starter strategy.

  • 1 - Conservative 0.25 Beta / 0.2 Corr
  • 2 - 0.5 Beta / 0.3 Corr
  • 3 - 0.75 Beta / 0.5 Corr
  • 4 - 1 Beta / 0.7 Corr
  • 5 - Aggressive - 1.5 Beta / 0.9 Corr

0 voters

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“Remember this is not your personal portfolio.” is a great comment. A protocol treasury should generally be more conservative as what is at stake is much larger than any single individual.

With that being said I am leaning towards a 3 of 5 just because I feel like where we are at with valuations and the current cycle being mid-range aggressive is most prudent. Once DeFi stretches into new ATH’s and ETH approaches its previous ATH I would be inclined to vote for a 2 of 5, so we still have long DeFi and ETH exposure but begin locking in gains and positioning for the inevitable pullback.

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this is great @feddas and @krugman25.

My one comment is that it is very hard to make an aggressiveness assessment without understanding what the other elements of the YAM strategy is for the treasury. If one looks at YAM and sees the performance of the investment side of the treasury as the main value driver of YAM, then the goal should be to maximize returns and a riskier portfolio is probably desirable. But if there are lots of other possibilities for the YAM treasury like investing in new products and other early stage protocols that can return multiples on their investment (and are therefore more risky), then a more conservative approach makes sense.

I see the goal of our Investment Portfolio Strategy as a way to manage risk and downside while still gaining some upside on the funds when they are not being used for other endeavors. If that is the case then the strategy should be growth with solid hedging. And I don’t know which number above is best in achieving that.

This goes without saying, but if this TokenSet does become a directly invest-able asset by anyone, then the YAM value proposition has to be more than just this investment portfolio. Otherwise it is far superior just to buy the TokenSet directly and avoid YAM altogether. So this product must be in service of everything else we are trying to achieve and we should be making strategy decisions accordingly.

My suggestion here is thinking of this as a set containing the entire treasury but having “arms” within it. This 1 - 5 aggressiveness scale vote is just for the “investment arm” of the portfolio. There will be other arms within the set that won’t be for investing and will be for other things like Yam Insurance and other new products Yam creates.

For example, if the Yam community votes to allocate 1M out of the treasuries 3 million for investing then we are really defining the aggressiveness for that 1 million. The other 2 million will be outside of these parameters and likely sit in stablecoin until it is deployed for those other purposes. The portfolio manager will still needs to manage the entire 3 million in the set but the specific parameters in this post only apply to the investment arm portion.

I agree, the entire treasury can’t be one large investment set. Breaking it into arms allows the entire pie to be dedicated to individual things, then a user buying this sets token is getting exposure to the investments arm, products arm, etc.

If that is the case though, how can we make an educated decision about the aggressiveness without knowing how much is allocated? If we allocate 2/3 then it should be less aggressive than if we allocate 1/6th.

The terminology is still not clear. The “investment arm” is investment into liquid secondary market tokens and not investment into YAM projects or other pre-market tokens.

I know this may sound pedantic but I think it’s hard to get signal from a vote when so much still feels hazy. So we should try to clarify this more explicitly so we can come to the same conclusions when reading the responses.

I would like this set to be available to the public for investment as something that can generate additional profits for YAM, so I think this portfolio should be isolated from the rest of the treasury. Outside investors can see the portfolio strategy and we would also publish it to the public to let them know what is happening but in order to vote and have their say, they will need to buy YAM tokens. Adding another layer of value to YAM holders.

This is setting parameters for 100% of the investment arm of the treasury. When we talk about investment portfolio we are talking about buying index’s (DPI), farming, staking, and hedging. Anything outside of that are for things like product/business ventures, and not included in this.

The community simply needs decide how much capital to allocate to this investment arm and how aggressive that investment arm is to be. Right now the investment arm is $500K (250K DPI and 250K ETH) and I would consider the other 2.5M stablecoin as being in the limbo/product arm. If we wanted to increase the investment arm the community could vote to move more of that 2.5M over into investments.

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I whipped up this graphic real quick to give a visual of the treasury and how it breaks down. The numbers and strategies are made up by me and not binding, but are just there to give the graphic some context. This forum post relates to the left side “Investment Arm” box in that graphic. The aggressiveness that the community chooses will determine how the portfolio manager decides % allocations to all of the boxes (strategies) inside of the investment arm box.

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I tend to agree with Ross that its difficult to get a good sense of how the investment arm should be calibrated from a risk perspective when we look at it in isolation. We can’t lose sight of that total treasury view, and if we have funds dedicated to seeding liquidity in new products like YCP, it’s probably accurate to consider that relatively high risk capital, where funds for contributor payments low risk capital.

I think we should probably get a holistic budget in place that has a percentage weighting to each portion of the treasury: investment arm, op budget (contributor payment, project development, marketing, etc), product liquidity

And then based on whether that investment arm is 10% or 70% of the total treasury, determine a risk level?

I agree but trying to calculate risk of entire treasury with ever changing potential operations / projects / risk is a difficult proposition at best. It would be best to look at the investment portfolio as it’s own isolated line item.

Yes 100%.

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