Hi @JosephKnecht , @afromac , @allan.g ,
I am pretty new to the community and have a lot to learn, but I read your update here and think I could offer some thoughts around rebalancing, from my professional experience. Improving transaction cost structures and market liquidity are definitely top of mind when it comes to aligning incentives with investors and minimizing operational expenses for Index Coop. I’d like to understand something better though, related to Index Coop’s Composite Indices:
From Product Performance - Surfacing Gas Costs, the post states:
“A single MVI or DPI rebalance typically requires 100 - 200 trades costing 20,000 to 40,000 USD in ETH. In total, automated & composite index rebalances have cost [more than $350k over the past 12 months] with the trend continuing upwards.”
Why are there 100-200 trades per monthly rebalance if the basket is composed of < 20 tokens? I know there is at least one thing I must be missing here, perhaps related to contracts or the structure of the index, so I will do my research and intend to fully understand that. My immediate next thought would be: could management of the tokens be consolidated, if it’s currently fragmented and causing a high volume of trades to be executed per rebalance?
I would really appreciate it if you could point me in the right direction to documentation on rebalancing methodologies or share more about how model selection and rebalancing is calculated and tested, beyond the methodology information published on the product websites. I ask because I am wondering how many different/which rebalancing methodolodies the Product & methodoligists groups (there are likely others involved I’m not omitting on purpose, I’m still learning my way around the Coop) have backtested to assess not only transaction costs but also impact to basket performance and its expected return and volatility distribution.
Considering a quarterly rebalance for Composite indices like DPI or MVI, with an additional condition of rebalancing if there is a one way 10% or 20% deviation (as an example) from model weight (calculated daily in a test environment) could yield not only transaction cost savings but also potentially better risk-adusted excess returns due to profit-taking and rotating out of high volatility tokens on a more opportunistic basis. Another idea to complement that would be to introduce a realized vs. implied volatility component to the model.
I would love to bounce ideas and debate on these topics if that would be helpful. I’m here as a personal investor and also someone with a tradfi background that sees the massive potential and believes in Index Coop’s mission & values. I’d like to be part of building something bigger and better than ourselves. I’d love to contribute whever possible but at the same time have a lot left to learn about Index Coop and its members so I don’t mean to overstep by sharing thoughts right away on the forum.
Thank you.