The idea began with Richard Tahta’s cousin, a talented amateur stock market investor. He would occasionally pass on useful trading tips, but Mr Tahta was frustrated that he seldom had time to act on them.
Believing that there were other frustrated investors like him, Mr Tahta’s solution was to join forces with fellow serial entrepreneurs Perry Blacher and Simon Veingard this summer to create Covestor Investment Management, an investment site that allows users to follow and replicate the stock market moves of traders with strong track records. It builds on Covestor.com, a social networking site for traders which they created two years ago, where investors come to show off their track record, ask for advice and share thoughts, a sort of Facebook for traders.
“Everyone knows someone who is really good at investing, and you just wish you could invest when they do,” says Mr Blacher. “But most of us are not that active in managing our portfolios when we have shares. We end up just holding on to them, when we should be selling.”
Since its launch, Covestor.com has attracted 20,000 users. From the ranks of investors on the site, Covestor Investment Management recruits traders with good returns and a coherent strategy to be “model managers”, investors whose trades can be linked to and followed. So far, it has signed up 10 such individuals, and it plans to add another 10 in the next month.
To join Covestor Investment Management, users set up an online trading account, and for a small fee – 0.5 to 1.5 per cent of the traded funds – link it to a model manager. When the model manager trades, the user’s portfolio will automatically make the same move seconds later.
The traders are paid a small fee by each follower and are surprisingly willing to share their investment track records online. They generally see it as a no-risk way to make a little extra money from the trading they would do anyway. “On a personal level, there is no downside,” says John Mooney, one of the model managers. “From my end, I don’t see a lot when my trades are being tracked and packaged. I am just a publisher; I am not directly responsible for how people do. But it is my own money that I am trading, so there is a desire to do well.”
Jeff Pierce, a full-time investor and financial blogger based in Canada who signed up to Covestor.com last year, agrees. “I wanted to show that I knew something about investing,” he explains. “In the beginning, I was worried about the trades being seen, but now I don’t think about it. I don’t think about giving away secrets – I always keep some things to myself – but it is always useful to make connections with fellow traders.”
There are many investment styles on offer: from Timothy Sykes, who monitors chatrooms and sites like Twitter for hyped-up stocks and invests against them, to Mr Mooney, a history professor who models himself on Warren Buffett. “I can’t compete with the Goldman Sachs trading desk, but I try to look beyond the two to three-year horizon,” he says.
Since it launched, Covestor Investor Management has handled more than 3,000 such replicating trades. It is aiming to reach trading volumes of about $1bn, the sort of level it needs to “be taken seriously”, says Mr Blacher.
The company, which is backed by Union Square Ventures, Spark Capital and Amadeus Capital Partners, is one of a number of online fund management sites that have been set up in recent years. Others include KaChing and Cake Financial.
But many social investing sites – such as SocialPicks and MotleyFool Caps – just trade portfolios of fantasy stocks and are more like a game. By contrast, Covestor Investment Management is registered with the Securities and Exchange Commission and stresses that its model managers are trading their own money.
Whether the company will make more money for users than traditional wealth management companies has yet to be seen.
Doug Dannemiller, senior analyst at Aite Group, the research firm, says online investment sites could become a useful addition to existing fund management services, but they are unlikely to replace them.
“You have to take anonymous advice based on a track record with a pinch of salt,” he says. “It is on par with getting investment advice from your brother-in-law or a neighbour. It could be the source of some good ideas, but investors should still vet them.”
Mr Blacher, however, maintains that Covestor Investment Management can offer a safer alternative to traditional fund management. He says investors are in control of their money because the shares always remain in their name, they can close the account at any time, and there are no exit fees. And every trade is completely transparent.
As he puts it: “A Madoff couldn’t have happened under this system.”
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