While much of the drama around fintech today hangs on the inherently pleasing prospect of new entrants disrupting the large, powerful and deeply unloved incumbent banks, less attention has so far focused on the potential to disrupt institutional asset management and hedge funds.
However, that is a market ripe with inefficiency, poor customer value and high charges to reward vested interests and subsidize inefficiencies.
So keep an eye on Huddlestock, a Norwegian-based crowd-investing platform now in beta testing that aims to launch this summer. It intends to provide a new way for investment strategists to freelance their best ideas, away from the hedge funds and established institutional asset managers where many now toil to make the key men wealthy, by building a distribution capacity to reach retail investors.
Murshid Ali, chief executive of Huddlestock, who took his PhD in economics at the University of Stavanger, tells Euromoney: “We will invite small investors to put their money into ideas rather than into stocks or funds where the transaction and friction costs are so high.
“Investors will not pay a penny unless they make money out of backing a strategists’ ideas, and then they will pay a percentage of any profit.”
There will be no equivalent of the hedge funds’ two, but there will be some variant of the 20, if perhaps closer to 10% to 12%.
Ali’s colleague, chief investment officer Michel van Tol, who holds a PhD in financial econometrics from the University of Maastricht, says: “While we believe that asset management, hedge funds and wealth management are ripe for disruption, we are not Robin Hood.
“The best strategists will develop followings of investors and get well paid for their intellectual property, though they will have to be competitive both on quality of ideas and on fees. What we are doing is perhaps more reconfiguring asset management, rather than disrupting it. We’re not trying to push people out. But, in the end, we believe in a meritocracy.”
Huddlestock states it will be highly transparent on fees. Its target customer demographic, for now, is 18 to 34 year olds, with small amounts of money to put to work.
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Ali says: “Today if you try to put £500 into a stock you can pay £35 in fees on either side of a trade. We have to be very price competitive because our aim is to open up investing to people who are now locked out of the institutional asset management market.”
The essential idea is that pooling lots of small investors, each with maybe a few hundred pounds to put into investment ideas, will derive scale benefits.
The founders of Huddlestock have talked to many investment strategists who today sell ideas to managers of hedge funds and institutional funds who would dearly love to reach the man in the street directly but cannot do so because the industry structure makes them too small to cover.
Ali says: “Trust me, there are plenty of bright people, now at hedge funds and institutional asset managers, who would love to provide strategies to retail investors if they could find the appropriate infrastructure.
“Often when those people leave a fund, they are ambitious to set up their own shop. They then find that as well as the challenge of convincing small numbers of very wealthy investors each to give them large sums of money to manage, it can also take six to nine months to get regulated, set up the legal structures and the rest of it.”
Huddlestock will run its operating company from London, under a regulatory licence from the Financial Conduct Authority. Part of its task is to perform due diligence on the investment ideas proposed by strategy vendors before posting these to investors.
Michel van Tol,
“We will review how the strategy performs in a live environment before opening it up to customers,” says Van Tol. “Initially, a strategy vendor might only disclose that the strategy is based on fundamental signals that have identified an underpricing of, say, a British telecom stock, or the overvaluation of a whole European market, while laying out the risks and opportunities, before then offering the idea to investors.
“It may then finally put their money to work by going, for example, long Vodafone or short the Oslo market.”
Investors on the platform can track the performance of strategy vendors and their ideas. If it has 100 vendors each providing three strategies, the idea is for investors to comb through and find the ones they like. Not everyone will have the same investment portfolios.
It is not a fund distribution platform but the hope is that investors come to form huddles around either successful vendors or successful strategies, and almost become virtual funds.
Ali says: “A key piece of the value will come from huddling, so having teams of friends or professional traders group together and giving them the ability to open their huddles to co-investors, is clearly something that is missing in the market today.
“Huddles are a good example of how we intend to remove barriers while leveraging our user base to attract investment professionals.”
Huddlestock will take its cut from the strategy vendors, and so is strongly incentivized to find good ones. It did a first fundraising in 2014, mainly from family offices in Norway, and is now talking to venture capitalists about a second round of funding that it hopes to complete before a launch in the summer.