Investment vehicles for digital assets

Learning Outcome Statement

Describe investment forms and vehicles used in digital asset investments.

On the exam: A short multiple-choice item gives vehicle terms, commitment and called capital, liquidity or valuation facts, and fee rates. It asks for a vehicle comparison, a classification, net proceeds, or a return.

A vehicle changes how you reach the digital asset and who performs the operating work. Direct ownership puts the asset in your hands, while an indirect vehicle gives you an interest in a structure that holds or tracks digital assets. Your answer depends on the wrapper's liquidity, valuation method, and fee terms. The exam rewards matching the vehicle name to those terms.

Market-priced exchange-traded vehicles generally offer more liquidity than private funds, but check the vehicle terms. Direct ownership gives the investor control but also custody and execution responsibility.

Use the comparison to identify the trade-off before choosing a form. Direct ownership leaves custody and execution with you, while a private fund places operations with its manager and may restrict redemption. An exchange-traded vehicle is priced in the market and is generally more liquid. Match each description to the question's stated terms rather than assuming every vehicle offers the same access or valuation.

🔒Direct ownership, private digital asset fund, and exchange-traded vehicle

Market value is current trading value. An appraisal or reported NAV can become stale when the underlying market is illiquid.

A private fund may state a commitment, $C$, as the contractual maximum you agree to provide. The amount called and deployed is invested capital, $I$, and the uncalled remainder is unfunded commitment, $U$.

Gross proceeds, $G$, are the exit value before fees. The management fee, $M$, and performance fee, $F$, follow the stated terms. Net proceeds, $N$, are investor cash after those fees, and net return, $R_N$, is net profit divided by invested capital. Use the relationships below to keep the capital base and return label separate.

$$ \begin{aligned} U &= C - I \ N &= G - M - F \ R_N &= \frac{N - I}{I} \end{aligned} $$

$U$ is capital the fund can still call. $N$ starts with gross proceeds and subtracts each fee, so either fee lowers cash to you. $R_N$ uses net profit in the numerator and invested capital in the denominator. State whether a return is gross or net, and measure net return against invested capital before comparing vehicles.

Worked example

You are handed a private digital asset fund with a contractual commitment of USD 100,000 and USD 80,000 called and deployed. The fund earns a gross return of 30% over a one-year holding period, charges a 2% management fee on invested capital, and charges a 20% performance fee on positive profit after management fee. You need the investor's net proceeds and net return.

Read the inputs as a sequence of bases. The 30% gross return applies to the USD 80,000 invested amount, while the management fee also uses invested capital for the one-year period. The performance fee has a different base: positive profit after management fee. Keeping these bases separate lets you read each bar as a distinct cash flow rather than applying every rate to commitment or proceeds.

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The waterfall starts with USD 80,000 of invested capital and adds USD 24,000 of gross profit. The two negative bars are fees: management takes USD 1,600 first, then performance takes USD 4,480 from profit remaining after that charge. What remains is USD 17,920 of net profit. Use the signs to track cash leaving the investor's return calculation and check that each fee uses its stated base.

Negative amounts are fee outflows, so they reduce the positive profit.

1. Separate promised capital from deployed capital because the return is earned on invested capital. Compute $U = C - I = 100,000 - 80,000 = 20,000.00$. The unfunded commitment is USD 20,000.00.

2. Apply the gross return to invested capital, not commitment, because only deployed capital earns the stated return. Use the decimal form of 30% and compute $80,000 \times 0.3 = 24,000.00$. Gross profit is USD 24,000.00.

3. Add gross profit to invested capital to get the exit amount before fees. Compute $G = 80,000 + 24,000.00 = 104,000.00$. Gross proceeds are USD 104,000.00.

4. Charge management fee on invested capital for the one-year holding period, not on commitment. Use the decimal form of 2% and compute $M = 80,000 \times 0.02 \times 1 = 1,600.00$. Management fee is USD 1,600.00.

5. Find profit after management fee because performance fee applies to positive profit after that charge. Compute $24,000.00 - 1,600.00 = 22,400.00$. This leaves USD 22,400.00 for the performance-fee base.

6. Apply performance fee to that remaining profit. Use the decimal form of 20% and compute $F = 22,400.00 \times 0.2 = 4,480.00$. Performance fee is USD 4,480.00.

7. Subtract both fees from gross proceeds to find cash received. Compute $N = 104,000.00 - 1,600.00 - 4,480.00 = 97,920.00$. Net proceeds are USD 97,920.00.

8. Subtract invested capital from net proceeds to find net profit, then divide by invested capital. Compute $97,920.00 - 80,000 = 17,920.00$ and $R_N = 17,920.00 \div 80,000 = 0.2240$. The net return is 0.2240 on a decimal basis.

The investor receives net proceeds of USD 97,920.00, and the net return is 0.2240 against invested capital. Compare this fund with another vehicle only after matching gross or net labels and the stated fee and liquidity terms.

Changed condition

Now keep the commitment, called capital, gross return, holding period, and performance fee unchanged. Only the management fee rate rises from 2% to 2.5%.

Before you look at the right column, predict the direction. The management fee rises from USD 1,600.00 to USD 2,000.00 because the higher rate applies to the same USD 80,000 invested capital, while the performance fee falls from USD 4,480.00 to USD 4,400.00 because less profit remains after management fee. Net proceeds and net return fall because the extra management charge outweighs the lower performance fee.

Before moving on, calculate the higher-fee fund's net proceeds yourself.

Common error

A candidate treats the USD 100,000 commitment as invested capital and compares a gross return with a net return. That feels right because the commitment is the headline amount and the gross return is the larger-looking result. The giveaway is that only USD 80,000 was called and the question lists management or performance fees.

Calculator

Use the calculator after the fee steps to divide net profit by invested capital and verify the net return.

Check yourself

Revision snapshot

Direct ownership gives the investor control but also custody and execution responsibility. Commitment minus invested capital equals unfunded commitment, $U = C - I$. Gross proceeds minus management fee minus performance fee equals net proceeds, $N = G - M - F$. State whether return is gross or net and measure net return against invested capital. Market-priced exchange-traded vehicles generally offer more liquidity than private funds. Check the vehicle terms. Market value is current trading value. An appraisal or reported NAV can become stale when the underlying market is illiquid. The trap is treating the USD 100,000 commitment as invested capital when only USD 80,000 is called, or comparing gross with net. Expect vehicle terms, capital amounts, liquidity or valuation facts, and fee rates, then classify, compare, or calculate.