Guru Networks Sell Social Investing to Copycat Traders – Bloomberg 06-26-13

Salient to Investors:

Social-investment networks, which started appearing in the middle of the last decade, are attracting record interest, turning top performers into market stars for individual investors.

The top traders – gurus – may have as many as 100,000 followers and 10,000 copiers, raising concerns among professional investors.

Justin Urquhart Stewart at Seven Investment Mgmt said gurus may be able to disrupt markets as thousands of followers buy or sell the same securities.

Raimund Saxinger at Frankfurt-Trust Investment said copying someone based on past performance can be dangerous, and in a big universe someone will always look good, just by the laws of numbers. Saxinger cited Barton Biggs’s national coin-flipping contest where, after 6 months, there would be 32 contestants left from 200 million entrants, and said gains in global equities over the past 4 may have increased the potential for survivorship bias to create a distorted picture of leading gurus’ skills. Saxinger said investors need to take into account the risks taken by these gurus in order to obtain the returns that they make.

Yoni Assia at EToro said gurus can earn as much as $10,000 a month in commissions for attracting people to duplicate their trades, and experience a sense of self-fulfillment. Assia said most clients have an interest in finance without the time or resources to be classed as a professional investor.

Matthew Klein at Collective2 said the Internet is great at breaking down barriers to entry, particularly in the financial world where going to the right schools and university still carry so much weight.

Aite Group says social investing attracts younger users and has a potential audience of hundreds of millions, and between October 2012 and April 2013, 17 percent of 254 brokerages serving individuals offered the ability to copy other users’ trades. Javier Paz at Aite Group said social investing allows inexperienced investors to benefit from the wisdom of crowds, but is concerned about the amount of borrowing traders use to increase the size of their bets.

David Jones at IG said social-network users still may not have sufficient information to judge the returns of fellow traders, and some companies only show the trading history of closed positions.

Read the full article at http://www.bloomberg.com/news/2013-06-25/guru-networks-sell-social-investing-to-copycat-traders.html .

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