Announcing Our New Product — Automated Vaults! Market Neutral Strategies With Low Risk and High APYs!
Dear alpacas,
In recent days, the crypto market has seen massive volatility. For those of us trying to yield farm or participate in DeFi, these large price swings increase risk and create uncertainty. As a result, we senior alpacas have spent a lot of time in the barn thinking about how we can create profitable yield opportunities for you, while minimizing risk, ideally bringing it close to 0. Now, we’re presenting a product that can do exactly that!
We’re proud to introduce a brand new class of products to Alpaca Finance — Automated Vaults! These are vaults that run complex strategies for you, similar to an on-chain hedge fund, and our first automated vault will deliver just what we’ve described earlier — an opportunity to earn high yields with no market risk! Introducing the Market-Neutral Strategy!
This vault will provide high APYs, at hedged-neutral market risk, which means it will be profitable in all market conditions, just like deploying capital in stablecoin lending!
❓What is the Market-Neutral (Pseudo-Delta-Neutral Strategy)
Some veteran alpacas should already be familiar with the concept. We’ve written about this strategy in the past, which you can find in our Alpaca Academy here and our yield farming calculator here.
A Market-Neutral Strategy (Pseudo-Delta-Neutral) is a leveraged yield farming strategy where you can yield farm high APY pairs while minimizing your risk by hedging out market exposure. The Automated Vault eliminates market risk by farming long & short positions simultaneously, and rebalancing them for you to maintain neutral exposure. Or if we put it in alpaca language: high yield and low risk.
This is achieved by opening one long position and one short position in optimal sizing to achieve zero net market exposure on the volatile assets. As the price of the volatile assets moves, the vault automatically rebalances the positions at optimal parameters so that they maintain 0 market exposure, and you are earning yields from market making the entire time.
Why not just invest in stablecoins instead?
Avoiding market exposure is the primary reason why some users participate in DeFi by lending stablecoins or yield farming in stablecoin-stablecoin pairs, as shown below.
These are very safe strategies. When calculating risk-adjusted return metrics such as Sharpe Ratios, you’ll find that investing in the above pools will provide spectacular results, and compared to banks or products in traditional finance, investing in stablecoins is a much more appealing proposition. However, let’s take a look at some of the APYs available when leveraged yield farming volatile assets:
Close to triple-digit APYs, 10x what you can get by investing stablecoins, is obviously much more appealing when just considering the returns. Yet, many people still prefer holding stablecoins. The primary reason is they don’t want to bear the market risk of holding volatile assets like ETH or BNB. For conservative investors, this is understandable. Even if they earn .25% per day from farming, they may be unwilling to bear 10% daily price swings in crypto assets in order to gain those kinds of APYs.
Well, now with our Market-Neutral Automated Vaults, all users will be able to get those higher APYs while eliminating thise aforementioned market risk, getting a similar risk profile to what they’d get by investing in stablecoins. In other words, you’ll be able to get 30–100% APY from farming pairs like BNB-USDT and ETH-USDT, while having minimal risk similar to lending stablecoins!
This is the innovative new direction we’re moving with this product class, to truly automate automated-market-making on DEXs, taking the risk out of the equation.
🚩Automated Vault’s Key Features
- Auto-rebalance: The key challenges in executing this strategy manually are having to monitor the positions (to prevent liquidation on one of the positions) and calculating how to adjust the positions as asset price moves to reset the net exposure back to zero. Soon, our Automated Vault will take care of all this for you, so young and veteran alpacas alike will be able to just sit back, relax, and enjoy the yields; auto-compounding, auto-rebalancing, auto-smiling.😎
- No liquidation risks: We are creating a specialized worker for this strategy that will remove the ability for keepers to liquidate the positions. This is because liquidation is unnecessary for this strategy. Due to the strategy having one long and short position, when one position drops in equity, the other one will correspondingly increase, meaning the net debt ratio across the aggregate strategy will be about the same which eliminates the need for liquidation.
Yet, if liquidation was turned on, though very unlikely with automated rebalancing, it would be technically possible that if the price of the crypto asset moved dramatically, one of the positions could be liquidated. With no liquidation, this risk will not exist within the Automated Vault.
As mentioned before, it’s important to note that this implementation DOES NOT increase the chance of bad debt to lenders, because the debt ratio of the aggregate Market-Neutral strategy will not increase. With this strategy, the Equity Value and Safety Buffer remain healthy at all times, which is why it is Market-Neutral. In fact, the volatile asset’s price could drop 90% and the aggregate debt ratio of the two positions would still not increase enough to trigger liquidation according to our current parameters. Of course, this would never happen because our rebalancing mechanism would kick in much sooner.
No liquidation is also one of the major benefits of this Automated Vault vs. running this strategy manually. - Auto-Compounding: To maximize the yields for our farmers, ALPACA rewards earned from the two LYF positions in this strategy will be auto-compounded for you, maximizing the yields and reducing position maintenance even further.
- No lock-up: You are free to deposit and withdraw any time.
📃Back-test Results
We have run an initial backtest with real BNB price data to simulate the expected return and received positive results, with our strategy achieving 40%+ APR for the period of Q4 2021 (1/10/21–31/12/21). This period saw BNB’s price make massive swings from 392 to 669, providing a sufficiently volatile time frame.
Data: https://bit.ly/3IBkoBp
Model Setup & Assumptions:
- Hourly Snapshot of BNB price
- 1,000 USD starting equity (supplied assets)
- 20% borrowing interest APR (60%+ utilization)
- Rebalance target to 3x leverage
- 0.09% daily yield farming APR (~32% APR) inclusive of CAKE rewards, trading fees, and ALPACA rewards
- 0.25% trading fees (applied to swap amount during rebalance)
- Debt accrued hourly
- Yield accrued daily
- Rebalance if Debt Ratio of one of the positions becomes > 70% (various thresholds tested in Data)
Results:
- APR: Achieved 40.73% APR over the period
- Maximum drawdown: ~1% which happened on December 4th when BNB price dropped ~20%
⏰Timeline:
The Market-Neutral Automated Vault is currently under development and we’re targeting a launch around the end of February. Follow our Twitter and other social channels for updates on our progress on this and other Alpaca initiatives:
