The return series is monthly and based on end of month account balance net of fees and adjusted for capital in and out flows, so: time weighted returns. The charts are rendered in time weighted geometric returns unless otherwise specified. Begin date is Aug 2015, end is June 2018.
The reference benchmark, when used, is an asset allocation ETF presented in total return terms. The benchmark allocation ranges from 40/60 to 50/50 depending on when you look at the sponsor's web site. The intention is to use that as a proxy for a default passive portfolio conservatively allocated. My choices are clearly debatable[1].
This is the time weighted geometric return over the interval:
This is the annualized time weighted geometric return as it it tries to find a longer term equilibrium as the months roll by:
Stand dev is not charted for reasons mentioned below. The allocation total-return benchmark at the end of the interval is around 4.8% standard dev when conventionally annualized. The alt risk is effectively zero, but....we'll see what that means.
Here is an annualization of linear, non-continuously-compounded monthly returns.
So what can we say? Over 34 months it looks like about "high 8%" compound time weighted geo returns (with no vol). Anyone catch any red flags in there? I did.
Red Flags and Other Concerns
Ok. So this is where volatility as a measure of risk fails. The monthly return series looks flat and so relatively safe in "ordinary" terms. But let's list some of the risk that this non-variance hides.
1. Default. This is a small, web-based, alt-risk, peer-lending solution with no history and a small investor/lendee base. The lack of variance ignores that there is a giant risk of platform failure. Like peer-lending in the consumer space, one is reassured by the people soliciting investor interest that the presence of notes or similar instruments on which one might have a claim in the case of platform failure helps...but I'd like to see how that works in practice in an Armageddon scenario. My guess is that one would have to plan on a return of somewhere around zero in an extreme situation...or a really really long wait for something > 0. That, and subtract some factor for personal time and maybe some legal fees.
2. Stable Risk? Like peer consumer lending, one forgets or ignores over the long haul, the drag of lendee defaults. Here we have relatively short effective maturity of underlying loans unlike peer consumer lending but the process will still unfold, especially if the team that runs the platform (a) cannot consistently evaluate risk well, and/or (b) cannot maintain (or grow!) a deal flow that is consistent in quality over time. In addition, this kind of thing has never seen a tumultuous business cycle. I'm already seeing more bad loans than I expected and we are in a great expansion. My guess is that my returns are at a peak and are more likely to fade (and fade hard) than improve. I don't know the platform's full term of experience but it can't be too much longer than my own entry. The bottom line here is that my time series is not only contains hidden red flags it is also kind of a red-herring.
3. Capacity. I have personally found the platform to be impossible to scale. The ready supply of available deals at any given time is low while demand is high. It makes it hard to deploy capital. Deals aren't always there and one has to be very fast when deals do become available (see item 5 below). It's like having a hotel where one can only rent some of the rooms (and less of them than planned) and where one does not efficiently know when guests have left a room open to rent. This is ok if one has 10k at risk but $1M would be a non-starter.
4. Strategy decay. This is something that killed my interest in peer consumer lending although some of their LP offerings might be of interest due to a type of default smoothing in the accounting (another red flag maybe). Here, in business receivables lending, there is also the possibility of decay. Some of this can be seen in chart three. The origin of the decay is un-diagnosed. It could just as easily be my inability to get capital to work effectively as deals mature as it is the platform team's ability to continuously find good credit opportunities or the cumulative effects of soured loans as time passes. See the last sentence of item 2.
5. Manual labor. Implicit in item 4 is the fact that this is a manual effort. Unlike the more mature peer consumer lending offerings there is no automated investing or LP offerings.
Conclusions
Interesting proposition but the un-named platform is not really ready for prime time in my opinion and I feel like what little capital I have at risk is hanging by a thread of unknowable and probably uncompensated risk. TBD
[1] for better or worse, probably worse, I use AOM here.
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