Tradestreaming

May 2012 Update: Tradestreaming Hedge Fund Guru Portfolio

Zack Miller — Fri, 01 Jun 2012 12:50:13 +0000

May was brutal. The S&P500 closed down over 6.27% and the Russell 2000 closed down 6.55%.

Tradestreaming Portfolio Performance

The Tradestreaming Hedge Fund Guru Portfolio closed down 5.1%. Beat the indices OK but still down. Not great.

The portfolio, which is a composite of all-star hedge fund picks from some of the most profitable investors around, rebalances quarterly.

Sales, Buys

We sold News Corp ($NWSA) down 1.4% and CVR Energy (CVI) down 2.5%. The portfolio added one name this quarter as many of the fund managers in the algorithm stuck with their leading ideas.

Real money portfolios are up 35.9% YTD in 2012.

Learn more

You can read more about my strategy and sign up to track/autotrade it on Collective2.

I develop my ideas for optimizing hedge fund replication strategies in my book Tradestream and I use AlphaClone technology to run my strategy.

What do you think about Tradestreaming’s weekly newsletter?

Zack Miller — Thu, 31 May 2012 14:24:29 +0000

I’m doing a little market research/crowdsourcing — I’d like to know what you think of my weekly newsletter.

I’m interested in hearing from you for 2 reasons:

Continuous improvement: Recently, I’ve heard from a lot of readers that they’re really enjoying the weekly email. I’d like to continue to make it better/more useful for you.
Testimonials: I’d like to let other people know how valuable you’re finding the newsletter. If you’re interested, I’ll include a link to your site if I decide to use it publicly.

You can get a glimpse of what I’m trying to do here with my new signup page.

So, please just give me 1-3 sentences letting me know what you like and what you’d like to see more of. I’ll check back with you before I publish anything.

>>>>Fill out my form!<<<<<

How transparent is financial social media really?

Zack Miller — Wed, 30 May 2012 12:50:31 +0000

Over the past few years, investors have been treated to an unprecedented level of transparency thanks to Twitter/Facebook/blogging.

With millions of people tradestreaming (the collective publishing of investing advice 24/7) out onto social networks, all an investor needs to do is just plug in and begin learning from investors much more experienced and talented than he.

Moving beyond just listening to the stream, many investors are replicating hedge fund returns by following top investors’ quarterly regulatory filings on sites like market folly and using research tools the likes of AlphaClone (affiliate link because it’s awesome).

Here’s an example of how I’ve built my own DIY all-star hedge fund.

Professional advisors and the social media pushback

But this post on Quora (if you’re interested, follow the Tradestreaming board on Quora) got me thinking about how transparent investors — particularly, investment advisors — really are online.

In fact, in talking with many portfolio managers about the merits of joining a marketplace for portfolio managers like Covestor, one of the biggest pushbacks I’ve heard has been the need to be completely transparent. It’s one reason why truly valuable actively managed strategies may not make their way to ETF format: investors can track (almost) every move.

As the Quora post describes, many investment advisors feel that their stock picks are their special sauce and wouldn’t do anything to jeopardize losing their edge.

There’s little advantage in it for them, because for most the exclusive nature is their bread and butter

Freemium: emphasis on the -mium

When they approach publishing online, these investors actually reveal very little of what they’re really doing with their portfolios. They throw a bone to investors here and there, but typically it’s just a throwaway investment idea, not something they’d stake their livelihoods on.

If these investment types are really using a freemium model to attract new clients, they’re definitely emphasizing the -mium part, not the free.

The downside risk of being wrong outweighs opportunity of being right

Of course, like financial newsletters, there’s a downside to being completely transparent — the risk of being wrong. Investors want to believe good managers (and newsletters) are infallible. All their picks go up. Returns are always outsized.

Just take look at Jim Jubak — he’s publishing away, airing his laundry for the world to see. He gets some right and some wrong. The point is no stock picker is going to be infallible.

Advisors have good months and bad ones — that’s part of the game and inevitable. It’s how well advisors limit their downside on the bad months that determines how good overall performance is going to be. Investors don’t like to think about how hard investing is (geez, May 2012 was impossible).

As Barron’s Steve Sears said in my recent interview with him:

Investors want a pharmaceutical solution to investing, a magic performance pill they pop to succeed.

But of course, for most of us, we understand that it’s not always the outcome of the investment advice. Rather, it’s the thought process, the intellectual back-and-forth to hone a thesis about what the world will look like in the future.

That’s hard but it’s also a conversation worth having. That’s why I’m betting on the tradestream as the future of investing.

photo courtesy of Fayster

Powering the next generation of financial apps — with Yodlee’s Joe Polverari

Zack Miller — Tue, 29 May 2012 12:41:14 +0000

Yodlee’s been aggregating financial information and data for 11 years now, powering some of our favorite financial apps.

Now, the firm is getting aggressive about enabling the next generation of fintech apps and platforms.

Chief Strategy Officer, Joe Polverari joins me on Tradestreaming Radio to discuss Yodlee’s new incubator/accelerator program and the resources the firm is committing to financial services startups.

Listen to the FULL Episode

About Joe Polverari

Joe is the Chief Strategy Officer of Yodlee and the GM of Yodlee Interactive, a new business unit at the firm.

Read the Transcript

COMING SOON

More resources

Yodlee (website)
Yodlee Interactive (runs incubator and accelerator)
Press Release announcing incubator launch

Even More Resources

Check out our archives
Subscribe to Tradestreaming on iTunes

Investing in domain names

Zack Miller — Mon, 28 May 2012 12:22:36 +0000

One of the things that interests me is the emergence of new asset classes. Whether it’s making 16% per year in taxi cab medallions or improving your fixed income returns with p2p loans, I’m on the lookout for new sources of investing returns and diversification.

Readers of my Twitter stream and my weekly newsletter were alerted this week that both Bloomberg and Reuters will now be publishing an index that tracks the value of domain names (website addresses).

The Sedo IDNX tracks the latest trends in domain prices.

Domain names rapidly gained in value between 2006 and 2007, with prices peaking in November 2007 (an increase of 76% compared to January 2006) before falling by 34% in the subsequent five quarters. Domains have steadily regained their strength since then, climbing to an all-time high in May 2011.

Domain name index performance

For more info on the index, its composition, and performance, check out IDNX.com. More specifically,

On average, domain prices grew by 9.3% per year in the last 6 years, exhibiting a boom and bust pattern that closely resembles the path of the overall IT market (Source: Valuable Words: Pricing Internet Domain Names)

The index has been assailed as not being representative enough or as putting investing in domain names in a bad light (high risk, low return) and maybe too correlated to other assets like the Nasdaq 100 (see here).

Read the response by the developer of the domain name index to these concerns.

Adding Michael Covel’s podcast to must-listen category

Zack Miller — Sun, 27 May 2012 19:32:50 +0000

One of the most popular sections on Tradestreaming is my list of the top investing podcasts.

I don’t add to it frequently because frankly, there aren’t too many good finance podcasts out there. If there are, at least I’m not seeing them…

I’m adding The Trend Following Manifesto with Michael Covel to the list. Covel, of Trend Following fame, has just been on a tear with some great interviews recently with the likes of Market Wizards’ Jack Schwager and Tom Basso.

I’m not a trader and don’t normally recommend trading-focused materials but this one’s well-thought-out and well-produced.

Check it out.

9 ways to improve your investing performance in P2P loans

Zack Miller — Thu, 24 May 2012 13:58:16 +0000

Source: Federal Reserve, Prosper.com

Yesterday, I discussed why I’m now a believer in peer-to-peer loans as a new asset class for investors.

Now, I’d like to look at how investors can lower their risks of defaults on these types of loans and boost their overall returns.

The problem with P2P loans

Like in most areas where information is asymmetrical between two parties entering a transaction, p2p loans present an informational problem.

Borrowers know a lot more about their potential to repay a loan than those making the loan.

In a traditional banking relationship, banks have resources to attach a number (a credit score) to a loan. Given experience and data, banks can estimate the probability that a borrower with that number will default. It’s an imperfect solution but works (at least, most of the time).

Borrowers on p2p marketplaces like Prosper.com aren’t given an actual credit score. Instead, they’re grouped into categories of credit worthiness which further complicates our ability as investors to assess their ability to pay us back.

Also, because multiple investors invest in the same loan, each individual investor may lack the incentive to do proper research (free rider problem). That’s according to Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com

How social networks help investors better their returns

To mitigate this problem, p2p loan marketplaces have created their own versions of social networks where borrowers can friend people and organizations.

And you guessed it — these groups are key to helping us investors determine the chance that our investments pay off (or don’t).

Why? Because research has shown that borrowers with friends on these investment platforms are:

more likely to get their loans funded (not necessarily a good thing — we want borrowers to get funded and be more likely to pay).
less likely to default on their loans (bingo!)

Why? It’s all about signaling.

The results suggest that verifiable friendships help consummate loans because they are credible signals of credit quality

Source: Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending

We want to invest in loans that provide us with a good return but are also the “right” type of borrower. Using friends and endorsements are key to solving this issue.

We show that borrowers with online friends on the Prosper.com platform have better ex-ante outcomes. This effect is more pronounced when friendships are verifiable and friends are of the types that are more likely to signal better credit quality. The results are consistent with the joint hypothesis that friendship ties act as a signal of credit quality, and that individual investors understand this relationship and incorporate it into their lending decisions. To further pin down why friendships matter, we examine whether friendships are related to ex-post loan outcomes. We find that borrowers with friends, especially of the sort that are more likely to be credible signals of credit quality, are less likely to default.

9 ways to improve our chances investing in P2P loans

1. Find borrowers with good friends

Friendships and networks are an investor’s best friends when investing in the p2p loan space because they’re our best shot at truly judging risk. ”Since borrowers on Prosper.com are only identified by user IDs and otherwise anonymous, friendship ties penetrate this veil of anonymity and lead to a potential for social stigma in case of a default” (Judging Borrowers by the Company They Keep, Lin et al). Look for borrowers with high-quality friends and friends who are also lenders.

Borrowers with a lender-friend are on average 9% less likely to default than those without (Lin, et al).

2. Identify borrowers with friends willing to invest

What better vote of confidence by a friend than him or her taking a piece of a loan? So, look for borrowers with quality friends who are willing and able to invest in them. Invest in people who have other people willing to put their money where their mouths (connections) are.

3. Work with borrowers who went to good schools

Research has shown that borrowers who are members of high quality social groups with particular connections to alumni of an learning institution

we observe better performance and higher returns…if the group is formed based on alumni or other tangible connections (Lin, et al)

4. Find borrowers who live in good geographies

Similar research has shown better performance/lower default rates based upon where a borrower lives.

5. Images sorta matter

One of the thing borrowers can do to complete their profiles is post an image of themselves. Research shows that once a loan is funded, it doesn’t make a hill of beans difference in terms of performance for borrowers with vs. without an image in their profile. That said, having an image may make a borrower more successful in getting his loan funded (for better and for worse)

6. Make mistakes, learn like crazy

There are some incredible resources and tools cropping up in the p2p lending ecosystem. A few of these are incredibly value to help investors scale the learning curve and better their investing returns in p2p loans. Here are just a few (what else should be included here? Let me know in the comments)

Lendstats: Great source for data on aggregate loan performance and more. (h/t to Peter Renton)
Social Lending: This site is a tremendous resource of one investor sharing his results and commentary on investing in p2p loans.
Nickel Steamroller: For those investors who want to crunch the numbers more, this site has a very useful toolbox like a portfolio analyzer, return forecaster, and interesting charts.

Look for more of these tools/sites to appear as p2p lending attracts more mainstream investors.

7. Narratives matter

Credit scores are just one tool we have as investors to judge whether a borrower will turn out to be a good investment or not. Motivated investors should go beyond just these scores when doing their research. Turns out that investors will do better when they identify borrowers who describe themselves as trustworthy (+1 for the moral compass, baby).

Specifically, lenders should favor borrowers who claim to be moral or trustworthy and avoid borrowers claiming economic hardship.

Source: Tell Me a Good Story and I May Lend Your My Money: The Role of Narratives in P2P Lending Decisions (Herzenstein, et al)

8. Ladder your portfolios with junky short term and higher-quality long term loans

Like good bond investors, it’s important to create a somewhat balanced portfolio.

Source: http://blog.prosper.com/2011/12/20/use-a-ladder-to-climb-your-way-to-a-better-return/

Propser.com has done some research to show that investors perform best if they create a 50/50 portfolio split between loans with 3 year maturities with lower credit ranking (D&E) + 5 year maturities with A&B credit.

The 50/50 portfolio has an estimated yield of 21.82% and estimated loss rate of 8.92%, producing a 12.90% estimated return. Comparing returns to risk, we get a ratio of 1.45 which is almost 46% better than a solely 3-year D & E portfolio. The return-to-risk ratio is a type of coverage ratio that indicates a margin of safety. The 50/50 portfolio offers much more potential coverage, at a cost of lower estimated return by only 2 basis points and 19% longer duration (a measure of a portfolio’s risk exposure to interest rate fluctuations).

9. Learn and improve your returns like crazy

Investing in p2p loans is a similar dynamic to investing in the stock market — there’s a learning curve. So, while you learn, keep your bets small and figure out what works best for you. It turns out, that’s what some of the most successful investors do with P2P loans.

They learn like crazy what works and what doesn’t.

As lenders observe late loans, they tend to decrease their funding of loans in the grade with the adverse shock and increase their funding of higher quality grades. These results indicate strong evidence of learning.

Losing money is a great motivator to learn how to make it. Here’s an example what investors are doing with P2P loans when they lose:

The high late and default rates of E and HR loans have driven lenders away from these loans and toward higher credit grades as lenders have learned about the dangers of investing in these lower credit grades.

Source: Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com

What are you going to do?

P2P loan markets offer investors access to an emerging asset class and offer borrowers an opportunity to skirt traditional sources of capital. When I wrote Tradestreaming, VC Michael Eisenberg of Benchmark Capital said he envisioned a day when cash-strong firms like Google or Apple would circumvent banks and get into lending themselves.

In a zero-interest rate world and one where the solvency of a large part of our banking system is being called into question, take a more serious look at P2P loan markets like my favorite, Prosper (that’s an affiliate link).

Why I’m a converted believer in investing in P2P loans

Zack Miller — Wed, 23 May 2012 12:49:46 +0000

If you’re like millions of people, you’re probably worried about your net worth.

Pretty worried.

The market’s up and then, it’s down. Jobs are being created and lost. Banks are stable and then they lose $3B seemingly overnight. And politicians? Nobody seems to have a strong plan to get us through and certainly not the political will to see it through.

It’s not entirely clear if the economy is recovering or not.

Investments: riskier, less diverse, zero confidence

If you have investments, you’re probably experiencing the following:

Volatility spikes: The market has the great ability to lull people into a false sense of security and then, wham! You get periods like the beginning of May where it feels like the world is ending. Nothing looks good right now. Nothing feels right, either.

Diversification doesn’t seem to be working: It may be exchange traded funds doing it or just a general move towards passive investing, but all types of investments are moving more in tandem. When stocks go down, they bring down other “safer” assets. The theory of diversification isn’t providing the benefits it promised. That’s where we are — when things are bad, it seems that there is nowhere to hide.

Lack of confidence in reaching financial goals: Many investors are just throwing up their hands. No más. They feel the stock market is rigged (it is, somewhat) and don’t want a part of it. But in an environment where bonds and CDs pay so little, underfunded-for-retirement investors need to reach for more risky assets and are forced to play a game that they don’t want to play.

What if I could tell you that you can triple the returns on the fixed income (bonds) part of your portfolio without taking on more risk?

Peer-to-peer lending: A better way

The more I speak with investors and entrepreneurs in online finance the more the topic of peer-to-peer lending comes up.

In peer-to-peer lending (p2p lending), borrowers post loans to a network of people who in turn issue small loans.

Now, before you scoff, I’ve spoken to really smart people. Risk managers, not gamblers. Some of these guys have hundreds of thousands of dollars in these platforms.

So, I began as a disbeliever (a p2p lending heretic, really) in all this stuff but frustrated with all the other investment options out there, I decided to do some more research.

Why NOT invest in peer-to-peer loans?

A main beef against the peer to peer lenders is that it’s so hard to judge creditworthiness.

True, it is hard but the tools are getting better to help investors judge their prospective investments in their peers.

Let’s see how well everyone’s playing with each other.

Objective look at default risk in bonds

First, let’s look at the historical default rate on investment grade and speculative grade (junk bonds) bonds.

Things go in cycles and you can see the spikes during different markets.

Now, these are averages and the default rates vary widely depending on the credit rating of bonds.

You can see here how over the life of a bond, the risk for defaulting rises severely and then sort of plateaus. Interesting to not here, BBBs — still seen as investment grade — approach an almost 10% default rate as they get closer to their maturity date. Time to pay the piper.

Now, let’s look at the data from one of the largest peer-to-peer lenders.

Source: http://www.prosper.com/welcome/marketplace.aspx

You can see the varying degrees of default rates and how the firm’s own credit rating impacts the default rate.

Below is a look of loans that were funded in the past year or so and what the estimated loss rate and return are.

Source: http://www.prosper.com/welcome/marketplace.aspx

From the table above, one thing I’ve noticed is that peer to peer lending firms — and investors who use them — are getting better at limiting losses.

Ha, S&P and Fitch are getting worse over time…

Risk and returns: P2P lending 1, Bonds 0

If you’re investing in junk bonds (where there is still a little yield), as time goes by, you have almost 50% chance of getting defaulted on. We haven’t seen, nor are seeing those numbers in the p2p loan market.

So, higher returns, lower defaults. That looks pretty good and may deserve to be a new asset class in your allocation or your clients’ allocations.

Hopefully, we’ll get beyond the stigma of investing in this new product over the next few years.

What about liquidity?

Another common quip I hear against p2p loans is their lack of liquidity. What if you want to sell?

One way to limit this is by really diversifying your investments around to numerous borrowers. Also, many of the large p2p loan marketplaces offer the ability to trade your notes (buy and sell). Check out Prosper’s deal with Folio Investing which trades notes through a registered broker/dealer (hint: there are chances to buy someone else’s note at a nice discount here, increasing your return).

What’s next

In my next piece on P2P loans, I discuss 9 ways to improve your returns in investing in peer-to-peer loans and reduce your chances of losing money.

Oh, by the way, here’s the link to Prosper (it’s an affiliate link but it’s what I use).

Who are the best investors in fintech startups?

Zack Miller — Tue, 22 May 2012 18:54:44 +0000

Been talking a lot to entrepreneurs in the space. I get a chance to hear their perspectives on their financial backers, investors with an eye to the future of financial services.

Here’s the beginning of a list of some of the best VCs in fintech. Who do you think belongs on there?

Investing on the edge: Weekly update on tech, social media and investing (May 22, 2012)

Zack Miller — Tue, 22 May 2012 12:33:45 +0000

Subscribers (free) to my newsletter received the following this week. It’s my best-shot at providing an overview on

important research and new investment strategies

new technologies, apps, and platforms for investors

insights into the behavior of investors

changes in the investment business

Subscribe here to signup.

Investment Products

How fund firms are luring advisors to use their products (Financial Planning)
Posted: May 17, 2012

This article describes the tactics fund firms are using (“value-added programs”) to encourage the usage and sale of their products for/to clients.

Vanguard lapping index fund competition (InvestmentNews)
Posted: May 15, 2012

Vanguard has seen over $65 billion in inflows, 4X the money its largest competitor (PIMCO) has seen.

AlphaClone signs partnership to license hedge fund replication index (AlphaClone)
Posted: May 15, 2012

AlphaClone, a platform that empowers creative hedge fund replication strategies, has taken a step that puts it one step closer to launching a fund based on its data.

Navigating the ETF Galaxy (Systematic Relative Strength)
Posted: May 15, 2012

This article by the folks at Dorsey Wright examines the state-of-the-art in ETF land and where the market is pointing for future growth.

Social Media, Technology and Investing

Financial services startup sector continues solid growth (analysis) (VentureBeat)
Posted: May 15, 2012

Money’s flowing to fintech startups. Here’s some research on how much money has been raised to date, who the winners have been and where the market is headed.

List of Finovate winners, past and present (Tradestreaming)
Posted: May 16, 2012

Here’s a list of historical winners of the leading conference for fintech startups.

Social online brokers Zecco and TradeKing merge (Zecco CEO blog)
Posted:May 15, 2012

Makes sense for the largest second-tier online brokers — both with a strong social bent towards investing — to tie up. Just happened earlier than many of us expected.

Stocial targets students with social network for stock advice (pandodaily)
Posted: May 17, 2012

Taking aim at Stock Track‘s business, Stocial is taking its social network for investing to college students.

Covestor: growing up and growing pains (OnWallStreet)
Posted: May 14, 2012

The marketplace of portfolio managers has been in the game awhile and this article describes where the firm’s come from and where it’s headed.

Wolfram launches finance platform (finextra)
Posted: May 15, 2012

Developer of Mathematica and Wolfram Alpha has turned its attention to the financial sector with a launch of the Wolfram Finance Platform. It’s a “suite of technologies for software development that integrates computation, data analysis, visualization and reporting.

The brilliant Joe Weisenthal (Felix Salmon)
Posted: May 10, 2012

In the wake of the NYT’s Binyamin Appelbaum’s 3000 word essay on the Business Insider’s Weisenthal, Salmon explains why Joe’s a leader in the world all his own.

Investment Strategies and Research

More on the low volatility anomaly (Abnormal Returns)
Posted: May 15, 2012

Tadas has been writing about this funny little bugger for a while and he’s happy it’s getting the light of day. Morningstar explains how low volatility funds may outperform high vol ones.

The best investors use the best data (Gemfinder)
Posted: May 14, 2012

Drawing from a theme in Moneyball, this article shows how Gotham’s Joel Greenblatt (Magic Formula) used its own sources of data for its research. It’s not only about using data better — it’s about using better data better.

Adaptive Asset Allocation: A true revolution in portfolio management (dshort)
Posted: May 14, 2012

This research piece shows how adaptive asset allocation outperforms other techniques.

Reflections on the WSJ Analyst Awards (Integrity Research)
Posted: May 14, 2012

Interesting commentary on the Wall Street Journal’s Best on the Street Analysts Survey published last week.

Investor Behavior

33 must-read investment books for your library (SigFig)
Posted: May 14, 2012

Here’s a list of some of the most important investment books — for beginner investors to professionals. What did I leave out?

The most common mistake investors make (Portfolioist)
Posted: May 11, 2012

Geoff Considine makes it all look so easy — investors still buy high and sell low. Individual investors vastly underperform market returns.

Bloomberg Businessweek captures national mag award (BloombergBusinessweek)
Posted: May 15, 2012

Beyond the self-congratulatory tone, this article says that paid circulation of BBweek has grown 13% over the past 2 years and the firm revealed it has over 100,000 subscribers to the Bloomberg Businessweek + app (launched April 2011).

The Business of Finance

Should investor relations be a rotational role? (Inside Investor Relations)
Posted: May 17, 2012

GE uses a model where IR professionals rotate through various roles. Is this a good model for the rest of the industry?

Quantipulations: Financial advisors’ use of LinkedIn (Snarketing 2.0)
Posted: May 15, 2012

A recent study showed that advisors who prospected on LinkedIn achieved a 62% success rate. This article calls total BS on that stat.

The work of editing economists (EconLog)
Posted: May 12, 2012

Timothy Taylor, managing editor of the Journal of Economic Perspectives, talks about his editorial job.

Why we need more female traders on Wall Street (Time)
Posted: May 15, 2012

In the wake of JP Morgan’s Ina Drew’s proverbial falling on the sword and resignation, Gary Belsky explains why Wall Street and some of the largest banks would benefit from having more women on staff.

And how would you like that performance reported, sir? (Jonathan Smith)
Posted: May 14, 2012

A tongue-in-cheek article about how financial advisors play around with their performance reporting to make themselves look better.

Why advisors like in-branch brokerage positions (Willis Consulting)
Posted: May 1, 2012

Years ago, bank brokerage programs weren’t all that appreciated. But, here’s why brokers are finding these in-branch positions more and more interesting.

Subscribers (free) to my newsletter received the following this week. It’s my best-shot at providing an overview on

important research and new investment strategies
new technologies, apps, and platforms for investors
insights into the behavior of investors
changes in the investment business

Subscribe here to signup.