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  • 🦙Alpaca Finance
  • Our Protocol
    • 🏆Our Products
    • 📈How to Participate
      • Introduction to Six Simple Strategies to Earn
      • Strategy 1: Hold a Token While Earning High Yields at Low Risk; aka Lend & Stake
      • Strategy 2: Hold a Token Pair to Earn Auto-Compounded Yields Without Leverage
      • Strategy 3: Supercharge Your Stablecoin Yields
      • Strategy 4: Multiply Crypto Gains in a Bull Market
      • Strategy 5: Yield Farm Profitably in a Bear Market
      • Strategy 6: Multiply Crypto Gains in Any Market by Hedging
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      • ⏫Leveraged Yield Farming Parameters
      • 📈AF1.0 Interest Rate Model
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      • 📙AF2.0 Parameters
  • Tokenomics
    • 📀ALPACA Token
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      • Burn Sources Details
  • Lending
    • 🏦Introduction to Lending
    • ❗Risks
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      • Lend & Stake
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  • Leveraged Yield Farming
    • 🚀Introduction to Leveraged Yield Farming
    • 🏊Pool-Specific Parameters
      • PancakeSwap Pools
      • Mdex Pools
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      • SpookySwap Pools (Deprecated)
      • WaultSwap Pools (Deprecated)
    • 🧮Leveraged Yield Farming Mechanics
      • PancakeSwap Farms
      • Mdex Farms
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      • SpookySwap Farms (Deprecated)
      • WaultSwap Farms (Deprecated)
    • 🌊AF1.0 Liquidation
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Open a Leveraged Yield Farming Position
      • Adjust a Leveraged Yield Farming Position
      • Close/Partially Close a Leveraged Yield Farming Position
      • Claim Rewards
      • Liquidate Positions
  • Automated Vaults
    • ⚙️Introduction to Automated Vaults
      • Market-Neutral Strategy
      • Savings Vault Strategy
    • 🧮Hedging Mechanics
    • ⏬Lowering Vault Leverage Mechanics
    • 🔏Private Automated Vault
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      • Invest in an Automated Vault
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      • Liquidity Providers
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    • ❗Risks
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      • Open a Leveraged Position
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      • Invest in & Stake ALP token
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  • Alpaca Finance 2.0
    • 💎Introduction to Alpaca Finance 2.0
      • Money Market
      • Leveraged Yield Farming
    • 🚀Launch Plan
    • ⭐Incentive Rewards
    • 🌊AF2.0 Liquidation
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      • Deposit
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    • 🗒️AIP Details
      • AIP-1: Handling of ITAM Rewards
      • AIP-2: Governance Vault on Fantom
      • AIP-3: Handling of Governance Vault’s Early Withdrawal Penalty
      • AIP-4.1: Handling of a recent bad debt on WaultSwap’s position
      • AIP-4.2: Solution to eliminate bad debt risks from remaining Waultswap positions
      • AIP-5: Interest Model Adjustment
      • AIP-6.1: Limiting Access to Automated Vault
      • AIP-6.2 Limiting Access to Automated Vault
      • AIP-7: Handling of a recent bad debt on Fantom Network
      • AIP-8.1: Increase AUSD utility by providing access to high-leveraged AVs
      • AIP-8.2: Increase AUSD utility by providing access to high-leveraged AVs
      • AIP-9: Deposit Liquidation Treasury Funds into Lending Pools while waiting to be used for buyback
      • AIP-10: Further optimizing the borrowing interest rate slope
      • AIP-11: Adjust Stability Fee for AUSD to help restore peg
      • AIP-12: Handling of bad debt from the recent stkBNB's depeg
      • AIP-13: Removing xALPACA requirement for accessing high-leveraged Automated Vaults
      • AIP-14: Close remaining LYF positions on stkBNB-BNB pool to avoid any potential future bad debt
      • AIP-15.1: Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-15.2: Distribution Method - Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-15.3: Incentives Amount for Perp - Incentives for New Upcoming Products (Perp)
      • AIP-15.4: Incentives Amount for AF2.0 - Incentives for New Upcoming Products (AF2.0)
      • AIP-15.5: Sources for Incentives - Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-16: Adjusting Slope3 max interest rate
      • AIP-17: Handling of extra ALPACA tokens from the AIP-15 incentives
      • AIP-18: Sunsetting Leveraged Yield Farming Support for MDEX pools
      • AIP-19: Implement Shielded Voting
      • AIP-20: Aligning AF1.0 lending performance fee structure with AF2.0
      • AIP-21.1: Adjusting bad debt repayment scheme from the stkBNB de-peg event
      • AIP-21.2: Adjusting bad debt repayment scheme from the stkBNB de-peg event
      • AIP-22: Paid Marketing Budget for Alperp and AF2.0
      • AIP-23: Sunsetting Leveraged Yield Farming Support for TUSD
      • AIP-24.1: New Governance Vault Implementation
      • AIP-24.2: New Governance Vault Implementation - Unlocking Period
      • AIP-24.3: New Governance Vault Implementation - Transferability
      • AIP-24.4: New Governance Vault Implementation - Early Withdrawal
      • AIP-24.5: New Governance Vault Implementation - Early Withdrawal Penalty Model
      • AIP-25: Migration from AF1.0 -> AF2.0
      • AIP-26: Transitioning the Governance Vault
      • AIP-27: Alpaca Insurance Plan Update
      • AIP-28: Updating Governance Voting Structure
      • AIP-29.1: Converting Remaining BUSD in AF1.0 lending into USDT
      • AIP-29.2: Charging conversion fees to the remaining BUSD depositors
      • AIP-29.3: Determining the conversion fees
      • AIP-30: New Product Proposal - Stablecoin
      • AIP-31.1 Handling of remaining assets in the AUSD’s stable swap module
      • AIP-31.2 Handling of remaining assets in the AUSD’s stable swap module
      • AIP-32: Distribution Plan to Lenders of Stablecoins from THE Liquidation
    • ⏭️Step-by-Step Guide
      • Lock ALPACA in Governance Vault
      • Lock more ALPACA/Extend Lock Time
      • Claim Rewards from Governance Vault
      • Add Custom tokens to your MetaMask
      • Vote on Alpaca Improvement Proposal (AIP)
      • Early Withdraw ALPACA from Governance Vault
      • Withdraw ALPACA from FANTOM Governance Vault on BNB Chain
      • Withdraw xALPACA from old Governance Vault
  • ALPIES
    • 🌗Introduction to Alpies
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      • Bridging Alpies from BNB Chain to ETH
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    • 👩‍🏫Alpaca Academy
      • Lesson 0 - How to Buy Alpaca and Start Earning Yields for Beginners(Lending+Staking)
      • Lesson 1 - Alpaca Finance’s Unique Use-Case — Shorting at a Profit
      • Lesson 2 - Introduction to Hedging with Double-Sided Borrowing
      • Lesson 3 - Liquidation Risk in Leveraged Yield Farming
      • Lesson 4 - Open/Close Positions With 0 Swap Fees
      • Lesson 5 - The Truth About Impermanent Loss and Common Misunderstandings
      • Proficiency Exams (earn NFTs)
    • 📚General Knowledge Articles
      • Navigating the Economic and Safety Landscape of DeFi
      • Yield Farming and Liquidity Mining: The Engines of DeFi Growth
      • Leveraging Advanced DeFi Instruments for Secured Funds Compounding with Alpaca Finance
      • Get Stablecoin Yields and Build Crypto Savings with Alpaca Finance's Lending Platform
      • Understanding the Basics of Decentralized Finance (DeFi)
      • Advanced Ways of Decentralized Trading with Alpaca Finance’s Perpetual Futures Exchange
      • Maximize Your Returns with Automated Vaults and Leveraged Yield Farming on Alpaca Finance
      • What does 'buy and hold' or HODL mean in investing?
      • What is DeFi Governance and why is it important?
      • What exactly are DeFi Money Markets?
      • What is yield farming and how does it differ from traditional investing?
      • What exactly does 'unlocking liquidity from long-term holdings' mean?
    • ❓FAQ
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      • 🧮APY Calculation
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  • Developers
    • 🐞Bug Bounty Program
    • 🎛️Protocol Configurations
    • 💻Integrating With Alpaca Finance
    • 🏛️AF2.0 Repurchasing Guide
    • ⚡AF2.0 Flashloan Guide
  • Past Products
    • 💵AUSD (Old)
      • 💵Introduction to AUSD
      • 💹How to Participate
      • 💦AUSD Liquidation
      • 〰️AUSD Price Stability Module
      • ❗Risks
      • ⏭️Step-by-Step Guide
        • Open an AUSD Position
        • Adjust an AUSD Position
        • Close/Partially Close an AUSD Position
        • Add/remove AUSD-3EPS LP tokens
        • Redeem AUSD for ALPACA
      • 📔AUSD Parameters
    • 🗳️Governance Vault (Old)
    • ⚡Early Withdrawal (Old)
    • 🌿Grazing Range (Old)
    • 💪Stronk Vault
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  • Market-Neutral Strategy
  • What is the Market-Neutral (Pseudo-Delta-Neutral Strategy)?
  • How it works

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  1. Automated Vaults
  2. Introduction to Automated Vaults

Market-Neutral Strategy

PreviousIntroduction to Automated VaultsNextSavings Vault Strategy

Last updated 1 year ago

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Market-Neutral Strategy

What is the Market-Neutral (Pseudo-Delta-Neutral Strategy)?

Some veteran alpacas should already be familiar with the concept. We’ve written about this strategy in the past, which you can find in our Alpaca Academy here and our yield farming calculator here.

A Market-Neutral Strategy (Pseudo-Delta-Neutral) is a leveraged yield farming strategy where you can yield farm high APY pairs while minimizing your risk by hedging out market exposure. The Automated Vault eliminates market risk by borrowing and the deploying an optimal combination of assets, and rebalancing them for you to target a neutral exposure. Or if we put it in alpaca language: high yield and low risk.

This is achieved by borrowing assets at optimal sizing and deploy them into an LP position to achieve a zero net market exposure on the volatile asset in a token pair. In the previous versions of Automated Vaults, this is done through two LYF positions due to our smart contract limitation that only allowed borrowing of one asset type in each position. In AVv3, we have made the code more efficient where a single LP position can borrow multiple assets, thus achieving the same results.

Notes on AV's exposure: In the short term, the exposure in an AVv3 could appear more "extreme" than what it used to be on the previous versions of AV. This is simply due to the nature of how CL DEX works. When the asset price moves to the edge of the LP range, the LP position ends up with almost one asset in its position (and completely in 1 asset when it's out of range.) This behavior is in a stark contrast to the UNIv2 where the exposure shift slightly as price move because you are providing LP from 0 to infinity. Hence, there could be a period where the vault's exposure deviate from the target depending on the market condition and the manager's strategy at the time.

How it works

1.) Farming with leverage allows you to earn higher yields. However, it comes with additional risk; Mainly, liquidation risk if the market moves against your position.

  • Example: If you open a 3x leveraged position on BNB-USDT (borrowing USDT), you will have a 1.5x long exposure on BNB.

2.) With the market-neutral strategy, we seek to eliminate the exposure on the volatile asset (i.e. BNB) by borrowing the right proportion of assets to hedge out the exposure on the volatile asset.

  • Example: For 3x leverage, the optimal ratio is borrowing 1.5x volatile asset and 0.5x stable asset. As you can see below, with this ratio, we will end up with 1.5x of volatile asset and 1.5x of stable asset (1x from equity + 0.5x from borrowed funds.)

Above scenario works as illustrative example. For UNIv3, it's true if you are creating an LP position with a symmetrical range on the upper and lower range. However, if the range is not symmetrical, the required assets ratio will be different.

With the optimal ratio, the borrowed assets will match exactly what is required to create LPs at 3x equity value. Hence, you achieve market neutral and only have 1x exposure on the equity you bring.

3.) As time passes, the positions will not remain neutral due to the accumulation of compounded earnings, borrowing interest, and price movements of the volatile asset. With the market-neutral strategy, the vault manager will determine, based on the hedging mechanics, when to execute a hedging transaction to reduce the exposure of vault.

4.) In addition to the hedging, we also have a deleverage transaction to act as a fail-safe mechanism that will take a percentage of the vault's assets and use to pay down debt.

5.) One major advantage of using our Automated Vaults vs. manually performing similar strategies is that Automated Vaults running market-neutral strategies will not have liquidation risk. The Automated Vaults' positions will not have connected liquidation bots, or allow liquidation. However, there is effectively 0 additional risk of bad debt for lenders from turning off liquidation due to our fail-safe mechanism.

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