Navigating Solana’s Evolving Yield Opportunities: Why Nimble Hedge Funds Matter
17 Jan 2025
Last updated
17 Jan 2025
Last updated
In the realm of finance, there’s a perpetual quest to seek the highest returns for a given level of risk. Risk-and-return dynamics constantly shift, and those skilled at identifying unique outliers often reap substantial rewards. This principle underpins the existence of hedge funds, venture capital firms, private wealth managers, and fund managers of all stripes—they’re paid to uncover these risk/reward asymmetries, and investors are willing to compensate them for access to potentially outsized gains.
We’re now seeing a rise in “hedge funds” on Solana, which signals healthy market growth. It suggests Solana has achieved sufficient scale to generate complex yields that a typical user may not fully understand or may not wish to manage themselves. That’s where fund managers come in: you pay them to handle the mechanics, and economies of scale make it worthwhile for the fund to do so, despite the time required.
As with traditional finance (TradFi), some participants in crypto aim to automate these strategies. However, I don’t believe full automation is the optimal path. Even in TradFi, where enormous amounts of capital and technology exist, hedge funds are still largely managed by humans. While advancements in AI might eventually change that, human adaptability continues to provide a decisive edge for now.
Markets, by nature, are efficient. Although crypto has fewer participants than TradFi and may not be as efficient, large asymmetric yield opportunities still invite competition, which, in turn, drives yields down over time. A strategy that looks profitable today may be less appealing tomorrow. Building an entire protocol on just one strategy is a losing battle.
Instead, crypto hedge funds—like their TradFi counterparts—must remain agile and dynamic. They need to track market conditions, develop new strategies, and constantly test and iterate to give depositors the best possible risk-adjusted returns.
Consider the recent trend of funding rate farming, a concept unique to crypto because funding rates do not exist in TradFi. Then, in 2021, UXD launched with much fanfare, introducing a novel delta-neutral stablecoin design on Solana. Even Anatoly and Raj backed it, a testament to its potential. UXD thrived in an environment of largely positive funding rates, leveraging native Web3 yields for stablecoins—a first for Solana.
However, when SOL’s funding rates turned persistently negative during the bear market, UXD’s core strategy faltered, and despite attempts to pivot, the project ultimately announced their shut down in late 2024.
Today, more advanced infrastructure can make funding rate farming not only more efficient but also more profitable. For instance, liquid staking tokens (LSTs) can now serve as collateral on perpetual platforms, offsetting losses during negative rates. One example is $JupSOL, which offers a 10% native yield.
Yet, even this edge will inevitably face pressure over time. Drift, currently the only perpetual platform on Solana accepting LSTs as collateral, has posted a negative average funding rate on SOL-PERP for the past month.
The rate would have been significantly more negative had it not been for a short-lived spike of over 60% two weeks ago.
Narrowing the window to a 7-day average drops it to around -12%, while the last 24 hours show a dismal -26%.
Markets change, yields compress, and any appealing strategy eventually draws enough participants to reduce its advantage.
All of this indicates a maturing Solana ecosystem. I’m genuinely excited about how far Solana has come in such a short span and eager for what lies ahead. At Elemental, we’ve adapted our strategies since launching in a deep bear market, capturing new opportunities as conditions evolved. The market is never linear—sometimes we advance three steps, only to move back two. Our yields reflect whatever opportunities arise.
I can’t predict the exact strategies we’ll deploy a year from now, but I do know we’ll keep testing, innovating, and refining our approach to deliver the most compelling risk/reward returns for our depositors. That adaptability is essential in an ever-changing financial landscape—and it’s precisely what we intend to maintain.
Twitter Post: https://x.com/moothefarmer/status/1880178741646914026
