We are very excited to submit a new methodology for an index product aiming to help non-professional investors - experienced as well as beginners - to automatically manage & rebalance their altcoin portfolio by optimizing its risk-adjusted returns.
Going by project name PMI (the Post-Modern Portfolio Theory Index), it has the opportunity to become the 1st index in crypto to be non-sector specific and optimize the downside volatility of its underlying assets.
1/ The Problem
When looking for diversification into altcoins, building a portfolio with long-lasting performance while minimizing its downside deviation is not immediate for all crypto investors.
Because getting your head around risk management and volatility is such a steep learning curve, placing bids on random projects based on external advice or crowd sentiment effectively feels more compelling than spending time and effort into fundamental research or data analysis.
This is where quantitative and rebalancing techniques get interesting : they can be combined to target the maximum growth while minimizing drawdown when price action becomes bearish - exactly like a professional trader or portfolio manager.
2/ The Product
The key performance indicator used to build PMI differentiates harmful volatility from total overall volatility by using the Sortino ratio, a key element of the Post-Modern Portfolio Theory (see this article for a detailed mathematical definition)).
The Sortino ratio is widely used in TradFi - yet passively - to track a portfolio’s risk-adjusted return. It has established itself as a more accurate indicator than its Modern Portfolio Theory counterpart, the Sharpe ratio.
Of course, being a good indicator of past risk-adjusted returns doesn’t mean that the Sortino ratio on its own can give an accurate prediction of any asset’s future performance. However, having tracked the Sortino ratio of a significant amount of tokens over more than a year, we were able to incorporate this metric into the following methodology.
2.1 - How it works :
PMI is based on the ranking of the best eligible tokens by annualized Sortino ratio, thus accounting for the time span difference over which performance is measured, and providing a projection of risk-adjusted return over a sensible period of time. The components are weighted in proportion of their respective score ratio to the overall.
2.2 - Market Opportunity :
PMI is a performance index targeted towards retail customers looking for diversification outside of Bitcoin, Ethereum or sector-specific indexes like DPI & MVI.
It aims to capture the early growth phase of a wider range of crypto projects and outperform market capitalization-weighted benchmarks, without introducing any subjective bias but relying instead on a rational and automated approach.
While this naturally points towards a customer base with higher crypto knowledge and risk acceptance than DPI or MVI, in our view PMI’s goal is also to help beginners to automatically manage and rebalance the riskier portion of their portfolio. In this respect, we believe that PMI has the potential to attract a wide range of customers inside and outside the current base of Index Coop’s.
2.3 - Value Proposition :
PMI is a self-driving smart beta strategy which provides exposure to any sector of the crypto industry (not just DeFi).
PMI clearly differentiates itself from the other indexes that have been launched by the Index Coop so far, or are in the product onboarding process.
PMI fully leverages the potential of the Set Protocol, with a high level of automation and computation.
If liquidity on the secondary market allows in the future, a portion of PMI could be allocated to LP or interest-bearing tokens presenting the best risk-adjusted intrinsic productivity : a selection based on the Sortino ratio of yield or fees would also work !
3/ The Methodology
Here are the various requirements foreseen before inclusion of a token into PMI :
3.1 - Market requirements :
- The token is traded on DEXes with reasonable liquidity such as Uniswap and Sushiswap.
- The token has a minimum liquidity of $3M (6M liquidity pool).
3.2 - Technical requirements :
- The token is an ERC-20 token.
- The token is not a stablecoin (neither backed by a reserve asset nor algorithmic).
3.3 - Safety Requirements :
- The token has at least 1 month history.
- The project must be considered to build a useful protocol or product. Projects with Ponzi characteristics, tokens with no utility, or projects that exist primarily for entertainment will not be included.
3.4 - Maintenance / rebalancing :
- The index composition should include minimum 10 / maximum 15 tokens in order to capture uptrend potential and dilute risk.
- The proposed rebalancing period is bi-weekly to manage risk as efficiently as possible in choppy market conditions.
Following this methodology and based on data processed between December 2020 and March 2021, we were able to identify a shortlist of 12 tokens to provide an illustrative PMI composition :
Please bear in mind that the ranking of tokens constantly evolves with the market and liquidity conditions, therefore it is only presented here for indication.
Starting from 1st March 2021 (4 weeks after the first available datapoint for $POLS), here is how PMI would have performed in comparison with the benchmark :
Over both timespans, PMI would have outperformed DPI in terms of annualized Sortino ratio and average daily return. Over the 2 weeks timespan, the standard deviation of PMI downside would also have been optimum.
4/ The competition
We haven’t identified any similar index product in the crypto space as of today.
5/ The Fees
We suggest discussing fees during the product-onboarding process. We can assume that this methodology will require substantial effort from the engineering as well as methodologist sides.
6/ Background & Commitment
“Monportefeuille.digital” has been rebranded into bloom.fi especially for this occasion !
We are the 1st French speaking community based around a DAO and a community token called $CIRCL. We aim to promote the learning and understanding of all things DeFi, as well as a positive and rational approach to crypto investing.
My name is Julien, I am the creator of the community and also Index Coop contributor since the end of 2020. My background is engineering, but I’ve been falling down the crypto rabbit hole since 2018 and experiencing an incredible journey so far - of which I’m now keen to share the learnings.
Together with my “other-Web3-half” and fellow DAO creator Benjamin as well as our community members, we strive to create an environment where the French-speaking audience can discover hands-on the incredible potential of blockchain and DeFi - but in a safe, transparent and accessible way.
We aspire to build on PMI and our contribution to Index Coop to take our organization to the next level by :
- Becoming an advanced antenna of the Coop in to boost its growth outside of the US
- Developing the liquidity and regulatory framework to open the 1st fully decentralized crypto investment club / fund in France
- Promoting our content under the form of blog articles () or educational NFT’s ( & )
- Oui / Yes
- Non / No