Big Hedge Funds Are Investing in Peer to Peer Lending, Should You?

This month’s Inc Magazine has a great article about peer to peer lending, and specifically Lending Club.  Lending Club (LC) is the world’s largest peer to peer lending platform and just went public.  The article primarily focuses on LC’s new foray into small business lending and how it can help entrepreneurs.

But buried in the back pages of the article is this tasty morsel:

Banks, hedge funds, wealth-management firms looking to bulk up their rich clients’ retirement portfolios, and other such investors now account for more than two-thirds of all the funding going through Lending Club.

This made me do a double take.  This is supposed to PEER to PEER lending right?  Banks and hedge funds are most certainly NOT peers.  Moreover, how in the world does a hedge fund like Arcadia invest over $200 million, as the article states, and make money on the platform?  Some of them do it by borrowing money and using the leverage to maximize returns for their investors.  And they use Lending Clubs automation tools to invest in thousands of loans at a time.

So how does the average investor compete with the big boys?  First off you have the advantage of having zero overhead.  You don’t need to extract a 2% management fee and 20% of the overall profits of an investment like a hedge fund does so you can pay the wealthy hedge fund managers.  So that leaves plenty of meat on the bone for a small time investor like you.  And you have access to same automated investing tools that the banks and hedge funds do.  

I have had a Prosper (Lending Club’s primary competitor in the peer to peer lending space) for about a year now.  And my return fluctuates between 13-14%.  That amount could go down of course as my loans age.  While that might not be exciting for some investors, I love it.  I set up the ‘My Quick Invest’ option so that the loans I specify are automatically funded at the amount I prefer.  It’s completely automatic and I just log in about once a month to see how things are doing.  

Here’s how I set it up my filters, with help from my friend Simon Cunningham from Lending Memo:

  • I exclude any loans from Florida and California
  • I invest very small amounts, just $25, in any individual loan
  • I target the riskier loans rated D, E, and HR
  • I mitigate those risks by targeting borrowers that have zero credit inquiries in the last 6 months
  • I target borrowers seeking debt consolidation loans
  • I target borrowers with at least $25k in annual income

Doing this has made nice 10%+ returns for P2P investors for years.  And I’m happy helping people that are trying to escape life-ruining debt.  

So is peer to peer lending something you’re interested in?  If hedge funds are piling in, It’s at least worth a look.  

Let us know what you think in the comments.

 

 

2 comments
Marvin D

I’m shocked that hedge funds are dipping their toe into p2p lending. I think it’s a good sign for the industry, but I hope it doesn’t drive down returns. I’ve had success with 10%+ returns for over 5 years now. Thanks for the article.

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Jason

While 13% might not be exciting for some, it sounds damn good to me. Especially if it’s consistent. But what about another economic downturn, anyone have return data for when the economy tanks?

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