# Problem

### 🧑‍💼The Managerial Power Hypothesis

Our thesis is that managing entities and third-party service providers alike hold enough power to pervert optimal contracting approaches, causing an agency problem that is inherent to the asset management industry. We label this as the *managerial power hypothesis*. 

The growth in power of the intermediary sector – and the declining influence of the beneficial owners of capital – incentivises intermediaries to engage in rent extraction from the assets they manage, leading to rising costs of finance and sub-optimal beneficiary-intermediary relations.

### 🏦Inefficiencies in Asset Management

The traditional wealth management industry and the few currently existing DeFi asset management protocols are not built to adequately address the managerial power hypothesis. As a result, the asset management industry is burdened with inefficiencies. These include:  

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<summary>👎Opaque Accountability Frameworks</summary>

In TradFi, it is assumed that shareholders are ultimately responsible for their investments. If they are unhappy, they can sell their shares and exit the investment vehicle.&#x20;

Naturally, not every shareholder who refuses to exit is voicing support for the adviser or its fees. Investors may believe that the trustees will protect them from exploitation.&#x20;

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<summary>👎Inflated Valuations of Fund Holdings</summary>

In TradFi, managing entities are tasked with the valuation of their fund's holdings, which essentially equates to calculating their own management fees.&#x20;

Failure to adjust values of holdings downwards leads to the artificial increase of a fund's net asset value, which in turn leads to shareholders paying too much.

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<summary>👎Higher-Than-Fair-Value Management Fees</summary>

This form of rent extraction is common in marketing and distribution fees, annual and quarterly custodian fees, and the loads and commissions paid to external consultants.&#x20;

Under this arrangement, fund shareholders pay twice: through the original management and performance fees and in the form of increased transaction costs.

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<summary>👎Excessively High Set-Up Costs and Barriers to Entry</summary>

In TradFi, the current set-up costs and requirement of a minimum of $50 million assets under management, automatically exclude smaller players from the market.&#x20;

Moreover, alternative investment funds remain solely accessible to accredited investors with a net worth of over $1 million or an average income of $200,000 p.a.

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<summary>👎A Disproportionately Long and Costly Intermediary Chain.</summary>

There is a structural dependence on service providers, transfer agents, the principal underwriter or distributor, brokers/dealers and the custodian.

All these intermediaries incur hidden costs, which lead to an increase in a fund's expense ratio. These costs are in turn absorbed by the shareholders.

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<summary>👎Late-Trading, Market-Timing and Front-Running Arbitrage</summary>

Due to informational asymmetries, managers can buy fund shares at a discount or sell them at a premium before a specific event is reflected in the price. &#x20;

This form of arbitrage is well documented essentially pits the adviser's financial interest against the interest of the fund shareholders.

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<summary>👎Sub-Optimal Contracting Approaches</summary>

Trustees are compensated through regular paychecks for their services in relation to the assets under management of the fund, increasing the likelihood of collegiality.&#x20;

The more assets, the greater the compensation. This preconditions trustees to seek and close advisory agreements that could very well be sub-optimal for the shareholder.

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