The short fund, once listed and being traded, will short and cover shares borrowed from the lending fund - and pay interest on loaned shares equal to 1% of the BTC value of the shares at the time they were borrowed plus any dividends.
Is that 1% per week, per month, per year?
And is it actually 0.5% if you're taking half the interest as management fee?
EDIT: The devil is always in the details and you haven't provided any. Basic information is missing such as how and when people can get their shares back.
There are more details on the reddit discussion, but I wanted to handle this as more of a discussion on the subject and provide answers to questions as the prospectus is still being finalized.
The shares will be transferable between the lending-side fund, which will act much like a passthrough fund using the exchange's transfer mechanism and will be processed as the requests are received via email notice. Obviously I have to sleep, but I wouldn't anticipate turnaround taking more than a few hours. I'd be willing to guarantee 12 hour turnaround as sometimes I may be at the bar before I go to sleep (for example).
The benefit to the loan fund is that its shares, being directly convertible to the underlying asset (no fee for transfers in or out) - which are themselves listed on the same exchange - is that you can transfer the shares to the issuer account and receive your underlying assets in response as soon as I can get to it; or, you can just sell the shares of the fund which itself floats on the market.
The benefit of using this pair system is that when the lending account and borrowing account are both managed by the same entity, if the lending fund's ratio falls below the target of shares on deposit versus shares on loan then the management can manually / quickly perform the short squeeze and make the relevant adjustments on both books.
The 1% was basically a stand-in figure for n% that needs to be both low enough to minimize its impact on short traders and high enough that it provides fair compensation to the loan-fund investors. The actual figure will be a superior annual % (probably in the 25%-50% range) that is charged weekly against the shares at their market price at the time they were borrowed by the short fund.
The short fund's assets include the proceeds of the sale of shares, which forms the collateral base of the fund, as well as a separately accounted-for cash balance from the proceeds from short-sales. These proceeds as well as additional collateral shares are utilized to manage the asset price (keeping the NPV within the bid/ask spread), to pay the dividends and fees owed to the lending fund, and it is only against this balance that the fund's own fees will be charged.
The funds will submit to regular audits and will regularly release information. I will not be using outside leverage (other than that provided from the lending fund) and will therefore be obliged to provide consistent updates on the fund's beta - as this system will obviously not allow for a full -1.00, and depending on the volatility of the underlying asset may need to hold collateral at the 150%-200% or more levels which would drop the maximum beta.
Neither fund is without risk, of course. Indeed, investing in the lending fund could actually impact the lender's position on a given asset negatively if the asset price went up too much too quickly. If the fund were observing 200% collateral on loans then if the price were to jump up by 300% overnight (
edit: it would have to be effectively overnight as if it happened during business hours I would be able to squeeze the shorts as the price rose. Such moves to the up-side (as these are the only moves that would negatively impact these assets) are not **entirely** unheard of, but as I'm focusing on the highest cap/highest volume securities this potential is somewhat mitigated -again, not eliminated-; but, as the market caps of these securities go up the headline risk to the downside seems just as (if not more) likely than a similar % move-generating event to the up-side. In any case, in the event of a massive upward spike that encroached upon the collateral reserve the short fund would be squeezed out and might need to be liquidated and the loan-fund could potentially drop below a 1:1 reserve ratio). It is for this reason that I anticipate re-investing a portion of the interest fees collected back into reserve shares to improve the ratio - although I want to avoid doing this unless I cannot think of a way around it, as it is not the intent of either fund to create either a short or long position on any security - but to allow for others to participate in a short position if they so choose or earn some interest on their long positions. The interest rates charged on loans will need to be sufficient for investors to accept the risk, and likely will need to be adjustable.
Valuable advice, which I enjoyed very much when I first read it months ago.
I have never had any interest in wasting my own time or money, or the time and money of others and don't expect this to do either. This is not a formal prospectus because I am soliciting feedback and discussion.
I have responded to some questions on the reddit post which may help elucidate the conceptual ideas behind these funds. Questions are encouraged.
second edit: Nowhere have I, or would I suggest that there is not serious financial risk taken on by short traders - and that there is not significant (but less) risk taken on by lenders. I am not discussing this as a way to make everyone wealthy - people are guaranteed to lose money short trading without knowing what they're doing. That said, I believe the benefits to the market and to people who do know what they're doing are significant enough for me to proceed.