Analysis

Can retail investors compete with hedge-funds in p2p ?

LendingRobot is claiming that it is difficult for retail investors or even high net worth individuals to manage so many micro-loans and to simultaneously compete with hedge funds looking to scoop the best loans under microseconds.

Peer-to-peer lending was designed to provide a platform to the investors and borrowers to lend and borrow money without the intrusion of a financial intermediary. Investors need LendingRobot’s algorithms to compete with Hedge Fund algorithms to get the best returns out of these sites. LendingRobot was co-founded by Emmanuel Marot and Gilad Golan in 2012. Emmanuel Marot (CEO) passed his Uniform Investor Advisor Law Exam conducted by FINRA and is the creator of algorithmic trading platform Zenvestment. Gilad Golan, (CTO) is an experienced engineer having worked as Vice-President of the Engineering Wing of Mozy and Senior Director at VMware. He earlier built up Pelican Security Software which was acquired by Microsoft in 2003. Lending Robot has a team of 7 professionals and majority of the employees are in the tech division. LendingRobot is headquartered in Bellevue, Seattle, Washington and raised $700k via seed funding from Club Italia Investimenti (in April 2014) and a $3M series A from Runa Capital (in January 2015) and other investors. The company has $80M dollars in Assets Under Management (AUM).

Managed accounts

LendingRobot provides fully automated investment services to investors in P2P lending segment. The Company simplifies the complicated task of investing through its unique “Fully Automated Mode” and uses robots for executing on behalf of its clients in P2P originators websites. Marot and Golan were individual lenders on these sites and they realized the acute problem in managing their personal P2P lending portfolio and reached the conclusion that management of funds and keeping a track record of them was a tactical and cumbersome task – the only solution to which was automation through robots. LendingRobot was registered in April 2014 with SEC as an Investment Advisor and it also entered into partnerships with Lendingclub, Prosper and Funding Circle – the leading Lending Platforms.

Computing power

According to a 2014 report in Risk Magazine, Hedge Funds and institutional investors account for over 60% of the amount lent on platforms like Prosper and Lending Club. They are using sophisticated robots to snap the best-performing loans, leaving retail investors and small family offices with the dregs. The company wants to even-out the computing power between the two set of investors with its own robot algorithms. Just to understand the magnitude of the difference between the two sets of investors, LendingRobot has to apply 100 servers to the lending platform to get all the loans it wants. The company is able to execute the entire task of selection and purchase within 850 microseconds. But even after deploying 100 servers, the company has a 90% win rate only. The company is also providing a free analytical tool for p2p investors to monitor their investments and their performance in real time. It has launched the LendingRobot dashboard, a mobile app that permits the lender to track their portfolio across LC, Prosper and FundingCircle. The app also has a “HealthMonitor” feature, which helps the p2p lender to see the overall value, current return percentage, average time to loan maturity etc for the entire portfolio.

Key numbers and liquidity

LendingRobot services are totally free for small investors having account value below USD 5000. It charges, for accounts above 5000$, a flat fee of 0.45% of the total value of the managed portfolio account. It has no setup or withdrawal charges. The smallest account LendingRobot is managing is worth $180 and the biggest one millions of dollars. The clients average earning, net of fees, vary in the range of 9 to 9.5%. The robo-advisor claims to be able to deploy the funds of its clients in a diversified portfolio within a span of six business days and also liquidate their entire portfolio or part of their portfolio within a maximum span of ten business days in normal market conditions – normal being the operative word.

Difference with general robo-advisors

Currently, LendingRobot is managing the portfolio accounts of 5000+ clients of a combined worth of USD 80 Million. The Company has been included in “30 Hot Fintech Startups to Watch” listed by Fox Small Business and has clients in 10 countries. The company is not looking to compete with mainstream robo-advisors like Betterment and WealthFront. The company’s objective is to dominate in its niche. The founders believe that “traditional” robo-advisors are a commodity because they have no real value added as their main activity comes from rebalancing ETF’s on the basis of Modern Portfolio Theory whereas LendingRobot has to manage constant acquisitions of loans, sales of underperforming loans and one of the major reasons of retail underperformance- reinvesting the cash received from interest and  principal repayments. The company also has to be wary of concentrating its portfolio on any one set of loans and diversification is vital for reducing beta.

The future

The startup’s unique selling point is its combination of big data, machine learning and cloud computing prowess, which allows it to match the returns sophisticated institutional investors are able to extract from a lending platform. The growth of the company is expected to further accelerate with the P2P lending segment growing @100% year on year and lenders opting more and more for robo-advisors on p2p platforms to juice up their returns. Algorithmic and High-Frequency trading have already taken over the other mature financial markets in the United States. With the advent of Robo Advisors in P2P, flaunting their supercomputers and their server proximity to a lending platform’s server, is the peer-to-peer industry going to change to robot-to-peer ?

 

Authors: Heena Dhir and George Popescu

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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