Options to Invest in Peer Lending
There are many options to invest in peer lending. We’ll go over each, discussing the positives, the negatives, and the costs.
The direct approach to peer lending.
When Lending Club and Prosper first began, the only way to invest in peer lending was by directly lending money to the borrower. Investors would go to a marketplace platform, create and fund an account, then manually select who to invest in from the pool of borrower loans available. Eventually, each platform created a simple auto-investment tool to alleviate the pain of individually investing in loans.
- Direct control of your account.
- It can be time consuming to research and set up investment strategies.
- If you don’t know what your doing, you could end up investing in notes that are not in line with your risk tolerance.
- Servicing fees (usually 1%).
Investing through a robo-advisor.
Robot advisors, or more commonly called robo-advisors, are financial technology (fintech) companies whose goal is to create a better automated investing method for peer lending. Robo-advisors use machine learning, data research, and statistical methods to create sophisticated investment algorithms. Investors can use these algorithms to select investments that match their risk tolerance.
- Easily piggy-back on other peoples research. Less complicated, more rewards.
- Investors cannot individually choose/sell notes seen on the peer lending marketplaces platform and must trust the robo-advisors algorithm.
- Servicing fees (usually 1%) + robo-advisor cost (Usually between .45%-.7%)
Investing through a hedge fund.
Hedge funds are a pooled investment vehicle that typically purchase a large quantity of notes, and allow investors to buy shares of the investment vehicle. Investors earn a share of the hedge fund’s profit. Hedge fund investment is offered only to accredited investors, which means you must either an institutional investor, or an individual with a net worth of at least \$1 million (excluding personal residence) or an individual annual income of at least \$200,000 in each of the last two years. Funds typically employ professional advisors to manage the fund. There are over 80 peer lending hedge funds available, each with its own investment methodology and strategy.
- Easy deployment of your investment, funds are professionally managed, and some funds have tools not available to individual investors, including leverage and exclusive access to certain lending platforms.
- Funds are typically expensive, opaque, and can be illiquid.
- Investment managers have the ability to restrict redemptions.
- A minimum investment of \$10-\$500k is typical.
- Platform servicing fees (usually 1%).
- A fund management fee (typically from .7% to 2% of assets)
- A performance fee (up to 20% of profits).
Investing through a 40’s act company (a mutual fund).
The Investment Company Act of 1940 was created after the 1929 stock market crash to regulate securities trading of mutual funds in accordance with the SEC. There are two approved peer lending mutual funds in the United States: Stone Ridge Alternative Lending Risk Premium Fund (LENDX) and Van Eck Overland Online Finance Trust (not currently traded).
- Same as a Hedge Fund, but federally regulated.
- Can be expensive, opaque, and illiquid.
- Redemptions are typically quarterly.
- Federally regulated.
- Depending on company rules, can have a minimum investment.
- Lendx currently charges 1.5% of assets + trading costs.
Investing through the stock of a marketplace company.
Some investors are more familiar with investing through the stock market. Two marketplaces with IPOs are OnDeck, a small business marketplace lender, and Lending Club, which focuses on consumer credit lending.
- Potentially larger gain if the company is successful.
- Potentially larger loss if the company fails.
- Can be expensive and relies heavily on economic ups and downs of the industry.
- Trading fees.
- Brokerage fees (if you decide to use one).
- High blood pressure (if you watch the stock price every day).
- Vanessa Hoying
- 1 Comment
Helpful to have these summaries. I’ve noticed there are a few hedge funds now that I see on BarclayHedge that specialize in investment in P2P (Marketplace) lending notes.