What's An alternative derivative backed equity?

Alternative Derivative Backed Equities (ADBEs) are a type of product that conglomeratizes a variety of Derivatives (bets based upon an underlying asset) into a fund whose value is dependent both on the notional and realized value of the derivatives as well as the investor confidence in the product as whole. 

To illustrate let's pretend there is a ADBE Investment Fund called "Corn Fund". This fund specializes in Corn derivative contracts (betting on the future price of corn). This fund then takes out a series of derivative contracts, and the fund's value then becomes the notional value of the contracts. As the value of those contracts rise and fall ahead of settlement date the fund can buy and sell contracts to earn money for the fund (this would be done using a series of advanced Machine Learning algorythms) 


Alternative Derivative Backed Equities in practice

Lets Create a mythical Fund X. Fund X invests in a highly specialized type of Alternative Derivative, Fund X invests in election outcomes. Fund X has made a series of bets on the outcome of the elections, and their fund performance is based on the performance of those underlying bets. As more data about the election comes in the Fund is able to trade their positions in order to better maximize their positions and their earnings potential. 

Let's say for example the Fund placed a bet with a payout amount of $100 on the outcome of the election. They bet that Candidate A would win. As more data comes in it becomes clear that this outcome is more likely and their position is looking more solid, that means that other parties are interested in purchasing their position, the fund can either hold the Derivative until the settlement date or sell it earlier for let's say $98, with the time value of money making the decision to sell worth it. 

As the Equity gains or loses on the bets it places on derivatives the Equity will gain and lose value. The Value will be determined by what the market is willing to pay. The underlying asset will be the notional value of the equity holdings but ultimately each fund is worth what the markets is willing to pay for the product.

Let's say a Fund begins with $1000. They place bets on contracts with notional values of $2,000 dollars (notional value can be significantly higher than reserves). If they win 60% of those bets the fund becomes worth $1,200. That means if the fund started with 10 investors each contributing $100 the value of their shares with a market that gives a 1:1 ratio (no confidence multiplier) then each share is now worth $120, a 20% gain. 

 


What's next for the project

The first step for the project is validating the idea through customer testing and market research. Early testing seems to indicate a high level of excitement about participating in ADBEs. Additional testing will take place to determine how easily investors understand the underlying concepts, as well as to determine investor reaction given a variety of market conditions.

Following the validation of the idea through market testing, a company will be formed to begin formalizing and commercializing the concept and idea. This company will begin creating model products and testing their results on a simulated market using simulated currencies. Then the difficult process of figuring out regulatory hurdles will begin.

Once the regulatory process has concluded products will become available for general trading on an open market, and the company will become responsible for the trading infrastructure, as well as creating funds, investor relations, marketing and promotion, market research and regulatory compliance.

We have no firm timeline beyond the initial testing phase but we expect testing to conclude by the end of June 2018, at which point idea feasibility will be determined.