Annualized 15%+ and drawdown less than 2%, how does Neutral use institutional risk control to "steadily" reap JLP dividends?
By Alex Liu, Foresight News
From JLP to Neutral
To make money, the first step is often to find high-quality assets. It's no exaggeration to say that JLP is one of the best assets in the entire crypto world. Its value tripled in the first year since its launch, with its largest drawdown being a 30% correction in March. This outstanding performance is accompanied by a massive fund volume exceeding $1 billion. How did it achieve this?
JLP price trends, data: coingecko
JLP stands for Jupiter Perpetual Liquidity Provider Token, the liquidity provider token for Jupiter perpetual contracts. Holding JLP is equivalent to depositing money into Jupiter to act as the counterparty to contract traders. If contract traders profit, JLP will lose money, and vice versa. Numerous similar products have repeatedly proven that over time, contract traders consistently lose money. This is JLP's first source of income. 75% of Jupiter perpetual contract trading fees return to JLP. This generous fee income has consistently maintained JLP's annualized income above 30%, sometimes even exceeding 50%. JLP itself is composed of 47% SOL, 8% ETH, 13% BTC, and 32% USDC, maintaining exposure to crypto assets. Consequently, in 2024, when SOL is strong, combined with the above two sources of income, JLP will more than triple. During the three months when SOL fell from $295 to below $100, JLP's limited risk exposure and the buffer provided by the aforementioned two types of returns resulted in a 30% drop. However, after SOL prices rebounded, JLP reached a new high.
Thus, JLP's losses stem from short-term profits made by futures traders in extreme market conditions (though statistics show they will eventually lose them...) and from the long-term weakening of crypto asset prices. The latter appears to be the only long-term risk. By hedging this risk, we can achieve a high-yield strategy with high-quality underlying assets.
Neutral is an institutional-grade on-chain hedge fund on Solana. It offers the following strategy:
Users deposit USDC and convert it to JLP. They then pledge JLP in a lending agreement, borrow USDC, and then convert it to JLP. (Profit is achieved when the annualized return on JLP exceeds the interest paid on the loan.) Finally, using perpetual contracts (Drift) to short the crypto asset shares (SOL, ETH, BTC) corresponding to the JLP holdings makes the strategy risk-neutral (theoretically, no losses will be incurred due to price fluctuations).
The Neutral vault for this strategy currently has a TVL (total value locked) of over $12 million, an annualized return of over 15%, and a maximum drawdown generally under 2%.
Retail Investor Risks and Institutional Advantages
So why don't I execute this strategy myself instead of using a product like Neutral? There's no commission involved (Neutral charges a performance fee of 10-25% for various strategies, deducting a corresponding percentage from the profit).
The reason is simple: retail investors often lack the ability to properly manage the risks associated with complex strategy returns.
While executing the above strategies, short hedging carries the risk of margin calls and abnormal funding rates, while leveraged lending carries the risk of losses due to long-term interest rate inversions. Even if you stay awake and monitor the market, you may not have the spare funds to add margin or unwind your lending cycle in emergencies.
Institutional hedge funds, however, are monitored 24/7 by their teams and possess extensive experience and contingency plans for handling various systemic risks. Their risk management is indeed superior to that of retail investors. Returns are premised on the security of principal. Whether to maximize returns through a Degen model or sacrifice some returns for greater risk management security requires careful consideration based on your individual circumstances.
Project Overview
Let's talk about the Neutral project itself. It's not the only on-chain hedge fund on the market. We chose to introduce it because it's collaborating with the Solana Chinese community for promotion, making it a relatively reliable endorsement. Furthermore, it has an ongoing points system and is expected to launch a token offering. This allows you to earn strategic returns while also maximizing your investment opportunities through project airdrops. (The points calculation rule is: 1 point per $1 in assets over a year, equivalent to 1 point per day for a deposit of $365.)
Neutral began as a winning project at the Solana Radar Hackathon and has since grown into a scalable emerging protocol with a TVL of nearly $36 million and nearly $2.5 million in user revenue. Founders Rick and Jared are experienced quantitative traders from Goldman Sachs and a top-three global hedge fund. On June 1st, Neutral announced it had secured $2 million in funding from Cumberland and a number of Solana ecosystem projects and participants.
In addition to its flagship JLP neutral strategy, Neutral also offers several other yield-generating strategies, including Hyperliquid rate arbitrage. It's important to note that not all strategies are risk-neutral. Strategies labeled "Directional" may fluctuate significantly with market conditions. Interested readers are encouraged to research these strategies.
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