The tokenized fund is on the rise. This exciting new way of investing has helped to transform the way investors get into the capital markets while expanding the opportunities for investment to everyone instead of a select few.
But there are many people out there who don’t quite understand how a tokenized fund operates, what advantages it offers to investors, and why these projects are growing in popularity. The tokenization of funds and assets may sound somewhat complicated but in reality, it’s not all that complex or tough to understand.
They don’t operate all that differently from something like a venture capital fund or similar project, except for the platform upon which the fund is run. Tokenized securities still must remain in compliance with current securities regulations that are mandated throughout the world.
The type of platform you select for getting into a tokenized fund is important, because how you invest matters. Since digitization is a vital component of the tokenization of funds and securities, you need to identify the best facilitator for managing a fund of this kind.
How a Tokenized Fund Works
As you may have guessed by now, tokenized funds are digital assets that utilized blockchain technology. Converting them to a blockchain allows for making capital markets quicker, simpler to access and, best of all perhaps, less costly for investors.
But it’s important to note that a tokenized fund is really no different than any other type of fund out there. The fundamental aspects are pretty much the same as these types of funds are still managed by a group of individuals who oversee the money for the purposes of investing it into a number of different ventures on behalf of investors. Investing in these funds can still allow for someone to maintain a widely diversified portfolio as a tokenized fund can still be applied to investing in many different opportunities along multiple organizations.
So just because a fund has been tokenized doesn’t necessarily mean it changes or ceases to be a fund.
Furthermore, tokenization does not affect the ways in which the fund managers assess, calculate, or minimize the risks being taken with the money contained inside the fund. Some might say, due to the very makeup of a tokenized fund and what it represents, fund managers may be more willing to get into riskier investing opportunities over those who are working within the parameters of a conventional limited partnership.
The Innovations of Tokenized Funds
Limited partnerships have always been built upon the concept that investors who get into such an arrangement should expect to be remain for ten years. That’s how most venture capital funds are structured and that is one of the many reasons why these sorts of funds attract the large investors and tend to lock out the so-called “little guy”.
But a tokenized fund can help to break down the barriers to involvement for investors who may not have the same deep wallets and but would still like access to an ever expanding global market.
Among the reasons why funds are only attractive to the larger investors is that extended commitment of ten years. Not everyone can afford to commit a substantial sum of their resources for such a lengthy period of time. The limited partners who have invested into the fund do so under the commitment of infusing the fund with a specific amount of capital.
In the initial stages of the fund, the venture capital managers seek out investment opportunities and when they find the ones they feel have the best advantages for the fund’s goals, they make a formal call to have the promised capital delivered. When it comes time to sell off the investment, the investors get their money back with the goal of seeing some level of return on that investment.
Simply put, investors in limited partnerships are asked to commit large sums of money to the activities set forth by the fund and then wait a decade to see that money again, maybe at a profit. That can be a lot to ask of average folks who would like to get into a fund but just don’t have that kind of money to earmark for such a lengthy commitment.
But this is not the case with a tokenized fund. By this arrangement, the fund is transmitted to investors in the form of a security that may then be sold again in as early as one year. The ability to get out of the fund in a significantly smaller period of time can allow for a wider array of potential investors to join.
That’s one of the greatest advantages of a tokenized fund, the capability for attracting more new investors through the use of a worldwide blockchain that provides access to investors around the globe. Through these methods, fund tokenization can bring with it the ability for setting specific ground rules and regulations that govern who is permitted to buy into any security.
This structure puts a sharper emphasis on investor returns which makes it a smart alternative to investing into the more conventional limited partnership arrangement. It also promotes an operational apparatus unhindered by the same tight governing models that dictate how conventional funds are allowed to operate. There is more leeway for a tokenized fund to invest as the managers wish, something that is not readily available with traditional funds.
Taking this into account, along with the greater liquidity afforded to investors in a tokenized fund and their ability to leave the fund when they wish instead of remaining locked in for ten years, makes these new funds very attractive to investors from all backgrounds.
Tokenized funds make those limited partnerships less limited and invite more investors to get in on the action. This is the new world of fund tokenization and it’s here to stay.