Hey guys,
I'm trying to figure out if P2P funds are really worth it. Most charge a 1% annual of assets and 20% of profit and some a 2%/20%.
Do they really provide anything useful or just similar filters to the more popular ones out there already?
The funds charge big fees. The funds do not disclose their strategy, so you have no idea how much risk they are taking.
When DIY, you can control risk as you like, and you don't pay some guy those big fees.
The choice is simple for me.
While the fees are an obvious cost, funds can provide benefits. One is that you can wire your money into the fund and you are invested immediately upon the agreed day. No waiting to buy loans. Due to the strong cash flow of this asset, you can also liquidate your position with pretty high likelihood with short notice. With a normal portfolio you'd have to let it run off or go to the secondary market. Some funds use leverage, which could be a benefit depending upon your risk appetite, and might be hard to replicate individually. Some funds also provide diversification across multiple platforms and credit classes (consumer, small business, student loan). There are four examples that could make the fees worthwhile.
Bryce has already been converted!
If you were venturing into forms of lending unfamiliar to you, it may be worthwhile to have someone experienced in that area of lending to do the decision making for you. May save a lot of money in the long run. The key is to finding someone who has the actual experience, and not psuedo experience that just sounds good. That may save you a lot of money, if it is a historically volatile form of lending. But 2/20 is a high hurdle for any fixed income based platform -- I assume this is why they all seem to use leverage, which may or may not be a good thing.
2 and 20. WOW! I had no idea this was going on with P2P funds. Straight up 2 and 20 with no preferred returns/hurdles? 1) I would find one of those PPMs an interesting read and 2) regardless of how well it read I would stay FAR away. Maybe Accel or Sequoia can have my money on these terms, but in this industry F no.
Haven't yet seen a P2P loan fund that is 2+20. Not sayin' there isn't one. I just haven't seen it.
One of 'em is 1% + 20%.
One of 'em is 0.75% + 10%.
None of them talk enough about their approach, so you have no way to judge risk.
LC's fund is 1% + 0%
LC does explain their fund's approach, so you do have a handle on its risk.
Suppose a fund earns about 10% on its loans, and then charges 1%+20%. The fee comes out 3%, so the manager gets 3% and you get 7%. Heck, he's taking nearly 1/3 of the income. I'd rather keep it all.
^They'd be using leverage, so the 10% would be a higher net return
Wow! 3%
Ridiculous. For fixed income product that is insane.
Obviously I'm biased but I think robo-advisors are the way to go.
A fully-automated investing solution brings the same kind of speedy execution, sophisticated loan selection and time savings than a fund, but at a fraction of the cost, since it doesn't have to maintain custody of the fund.
It's also often more accessible (e.g. not only for accredited, no setup or exit fees) and more flexible (you can let the robot decides entirely for you or define some criteria).
the ability to liquidate your entire balance in a one month period makes it totally worthwhile.
Be careful with the assumption of immediate redemption with Fund. Most funds have redemption condition of best effort basis. Redemption is not an issue during normal times when fund cash inflow and cash receipts from investments exceed the redemption requests. In situations of large redemption requests, funds will throttle redemption amount and spread redemption across multiple periods to avoid impacting the performance for existing investors.
Automated lending is a "passive" strategy and can be implemented cheaply. Most funds go beyond passive automated lending and actively manage the portfolio including modifying loan selection criteria and leverage based on macro-economic environment, securitize and sell portfolio loans, and exposure to platforms not open to retail lenders as well as whole loan programs, etc.
Agree with you totally Fred. I currently have almost equal amounts in Lending Club and LC Advisors funds. The portfolio in Lending Club is currently beating the return in LC Advisors and yet both require no effort. The difference may partially be attributed to the fees of Advisors.
On the other hand I have been able to liquidate out of a fund in one shot, and cannot see selling out on Folio without taking a big hit
I invest in both funds and directly on LC.
1. One strong reason for investing in a fund is to get higher liquidity. I am fully aware that liquidity depends on the pipeline (P&I and new subscriptions) but it can potentially get me out quickly if I need the cash. Don't think I can liquidate a large amount on folioFN without a steep discount.
2. Another reason is that the fund can ramp up much faster than I can on the retail side. It would probably take months to buy in the amount I have invested on the fund side.
3. Funds can offer 2 -3x leverage that it's very difficult to access as a retail investor.
4. A very small issue is that the fund is in a remote bankruptcy vehicle, which helps a bit but as I said I'm also invested directly.
funds generally diversify across platforms so I don't think one would necessarily limit itself to LC.
There are even funds that securitize the loans keeping the remaining equity tranche
one downside to funds though is that it complicates your tax filing because you're investing as a limited partner in a tax passthrough vehicle.
Ok, you're getting closer. I note that neither article actually mentions a specific fund that does buy P2P loans with 2x or 3x leverage.
The 2nd article comes close
erm...what does securitization mean to you?
A birdie told me that Blue Elephant's P2P fund is leveraged. I thank the birdie.
We will know when the tide goes out. I expect a lot of interesting things to come from that