How Can a Portfolio Manager Use Derivatives to Hedge against the Risk of Token Governance Changes?
A portfolio manager can use derivatives, such as futures or options, to hedge against the financial impact of adverse governance changes. For instance, if a controversial proposal is being voted on that could negatively affect the token's price, the manager could buy put options or short futures contracts on the token.
This creates a synthetic short position that profits if the token's price drops. This strategy allows the manager to maintain their long-term investment while mitigating short-term governance-related market risk.
Glossar
Synthetic Short Position
Construction ⎊ A synthetic short position in cryptocurrency derivatives replicates the payoff profile of a traditional short sale without directly owning the underlying asset.
Token Governance
Mechanism ⎊ Token governance, within cryptocurrency ecosystems, represents the codified set of rules and processes dictating how changes to a protocol are proposed, vetted, and implemented, fundamentally shifting control from centralized entities to a distributed network of stakeholders.
Tokenized Vaults
Structure ⎊ Smart contracts that hold and manage pooled assets, often securing them with underlying collateral to issue tokenized representations of that pool's value or yield potential.
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.
Adverse Governance
Manipulation ⎊ Malicious actors exploit voting weight to pass proposals that benefit specific interests.
Portfolio Manager
Mandate ⎊ The Portfolio Manager is entrusted with the fiduciary responsibility of constructing, monitoring, and rebalancing a portfolio of digital assets and their derivatives to achieve specific risk-adjusted return targets.