Author Topic: P2P Based Funds  (Read 9350 times)

JustTryinToMakeABuck

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P2P Based Funds
« on: May 30, 2016, 01:10:22 PM »
I'm new to P2P lending, having recently created and funded accounts at Lending Club and Upstart.

Recently I came across Prime Meridian Capital Management (http://www.pmifunds.com/) and its funds (available to accredited investors only). Assuming I understand their literature correctly, in addition to fully automating the investment process, they increase the liquidity of the invested funds so that they're available on a month's notice. Net of management fees, their returns to investors for their income fund (which invests in Lending Club and Prosper loans and uses no leverage) was 9.89% in 2013, 8.51% in 2014, and 7.74% in 2015. I know that these returns are not at the top end of the scale of what others have achieved, but I find the increased liquidity attractive.

Until stumbling on Prime Meridian, I was not aware of P2P-based investment funds. I'd be interested in comments on the pros and cons of such funds, whether from Prime Meridian or other companies.

Fred93

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Re: P2P Based Funds
« Reply #1 on: May 30, 2016, 06:59:52 PM »
First, LC has several of their own funds.  One conservative, one broad based, and one high yield.  They are run by LC's subsidiary "Lending Club Advisors".  You can call LC and ask for info.

Others include:
http://www.pmifunds.com/
http://www.bluelep.com/
http://www.dirlend.com/
http://www.arcadiafunds.com/
http://www.rivernorth.com/

I haven't checked, but if you read the offering materials carefully, that offer of monthly liquidity comes with a condition.  If a bunch of people ask for their money at once, they'll make you wait.

JustTryinToMakeABuck

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Re: P2P Based Funds
« Reply #2 on: May 30, 2016, 07:09:31 PM »
Thanks for the links. I've read the PPM for the Direct Lending Investment Fund (http://www.dirlend.com/), and you're correct, the ability to get your money out is at the discretion of the fund manager based on the available cash in the fund. If things go south, and everybody heads for the exits at once, the theoretical liquidity remains just that: theoretical. At the same time, under "normal" circumstances, I'd expect the liquidity to truly exist, which is attractive compared to waiting 3-5 years for notes you've invested in to get paid back.

Fred93

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Re: P2P Based Funds
« Reply #3 on: May 30, 2016, 07:26:44 PM »
under "normal" circumstances, I'd expect the liquidity to truly exist, which is attractive compared to waiting 3-5 years for notes you've invested in to get paid back.

I don't know how familiar you are with this stuff, so pardon if I'm stating the obvious.  A lot of people get hung up on this idea of "waiting 3-5 years to get paid back", but that can be really misleading.

Loans make payments every month.  Every month you get money back.  A 3 year loan makes 36 equal sized payments.  That means if we assume no prepayment and no default (ie the nominal case) you get half your money back in only 18 months.

This is different than a bond, where most of the money comes back at the very end.

But wait, there's more.  A lot of loans payoff early.  That means on the average, you get paid back faster than the nominal case.  The average comes out more like 15 months.  (Depends on what grade of loans you invest in, etc.)

The technical term for the time until you get your average dollar back is "duration".  The duration of LC's 3 year loans is under 15 months.  (I haven't run the calculation lately.  You can run a calculation on LC's historical data, including the effects of defaults and prepayments and get a more precise number if you care to.)

A significant amount of money comes back you to every month. 

I know that's not the same as saying you can get your money out on demand, like a checking account, but then you're being paid a helluva lot more than a checking account, and you do have some liquidity, even if you buy-and-hold.



JustTryinToMakeABuck

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Re: P2P Based Funds
« Reply #4 on: May 30, 2016, 07:51:31 PM »
You make a good point, but there is still a difference between expected full liquidity in, say, 15 months, versus in 1 month. At the same time, you also make a good point that there is a difference between partial liquidity and full liquidity.

I'm currently set up with LC to accept a mix of 3 and 5 year notes, so presumably my expected full liquidity is somewhere around 25-30 months?

AnilG

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Re: P2P Based Funds
« Reply #5 on: May 30, 2016, 10:30:39 PM »
You might want to re-consider points made by Fred about liquidity. There is no free lunch. You can not get your money back from fund until the fund has cash to distribute to you. There is no 30-90 day liquidity during distress when underlying assets are of longer 15 month duration and can't be easily sold to meet your request for money.

The sources of cash for a fund, in order of increasing difficulty and increasing haircut to fund and their investors, are [1] incoming new investments from new investors, [2] repayments received from loans, [3] Style drift to increase cash inflow, [4] a line of credit by fund, [5] selling partial holdings to meet redemption requests, and [6] liquidation of fund. As long as incoming investments from new investors exceeds redemption amount needed, fund will fulfill your redemption requests without impacting the fund performance. Anything more, funds will start slowing down redemption requests.

Several funds late last year/early this year ran into issue of duration mismatch and resulting cash crunch to meet redemption requests when corporate bond market faltered.

You make a good point, but there is still a difference between expected full liquidity in, say, 15 months, versus in 1 month. At the same time, you also make a good point that there is a difference between partial liquidity and full liquidity.

I'm currently set up with LC to accept a mix of 3 and 5 year notes, so presumably my expected full liquidity is somewhere around 25-30 months?
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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JustTryinToMakeABuck

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Re: P2P Based Funds
« Reply #6 on: May 31, 2016, 02:16:09 AM »
The sources of cash for a fund, in order of increasing difficulty and increasing haircut to fund and their investors, are [1] incoming new investments from new investors, [2] repayments received from loans, [3] Style drift to increase cash inflow, [4] a line of credit by fund, [5] selling partial holdings to meet redemption requests, and [6] liquidation of fund. As long as incoming investments from new investors exceeds redemption amount needed, fund will fulfill your redemption requests without impacting the fund performance. Anything more, funds will start slowing down redemption requests.

I'd assume that there's also[0] cash held back to service redemption requests. My understanding is that mutual funds don't invest 100% of their money, because they know they'll need some on hand for redemptions, and I'd expect P2P-based funds to do the same thing. Such uninvested cash, in addition to management fees, is why funds typically have lower returns than investments that go directly to the underlying assets purchased by the funds. (E.g., why funds based on LC notes will typically underperform direct investments in LC notes with the same risk profile.)

Increased liquidity, even if it's not guaranteed, has a cost associated with it. Even so, I take funds at their word when the say one of their goals is to provide, say, 30-day liquidity, even if they don't guarantee it. Is that naive on my part?

Fred93

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Re: P2P Based Funds
« Reply #7 on: May 31, 2016, 04:30:44 AM »
Peter (the guy who owns this board) just interviewed Blue Elephant.  You may be interested in this...

Podcast
http://www.lendacademy.com/podcast-65-brian-weinstein-blue-elephant/

or pdf
http://www.lendacademy.com/wp-content/uploads/2016/05/Podcast-65-Brian-Weinstein.pdf

brycemason

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Re: P2P Based Funds
« Reply #8 on: May 31, 2016, 09:17:02 AM »
Some gates are more investor friendly than others, such as not allowing the fund manager to make new investments until all redemptions are met.

GoodUsername

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Re: P2P Based Funds
« Reply #9 on: June 01, 2016, 11:20:44 AM »
Forgive my ignorant question: I saw "leverage" being mentioned several times in the Blue Elephant interview. I do have a notion of leverage in an ETF. How does that work for loans?

RT45

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Re: P2P Based Funds
« Reply #10 on: June 01, 2016, 01:29:31 PM »
Same question. So does a Charge Off mean a 2-3x hit as well?

rawraw

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Re: P2P Based Funds
« Reply #11 on: June 01, 2016, 05:06:42 PM »
If I borrow $100 and put $100 in equity, I can buy $200 in notes.  If my return is 10%, I make $10 from equity and $10 from debt (debt will be lower in reality due to interest expense).  So I made $20 / $100 equity = 20% return.  If I have a 2% charge off rate that is 2% of $200.  That is 4 / 100 = 4% charge off rate of equity.  I go bankrupt at 50% charge off rate instead of going broke at 100% charge off rate

Fred93

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Re: P2P Based Funds
« Reply #12 on: June 02, 2016, 07:53:52 PM »
Forgive my ignorant question: I saw "leverage" being mentioned several times in the Blue Elephant interview. I do have a notion of leverage in an ETF. How does that work for loans?

Same idea.  Just different source of leverage.

The large NY banks (Citi, MS, Goldman...) have a big business lending money to hedge funds for leverage.  Hedge fund guy goes to the bank and get the bank comfortable with the stuff he buys (in this case loans).  He takes in $X from limited partner investors, and draws $X from his credit line at the bank, and then invests $2X in loans.  He gets 2X the interest, 2X the charge-offs, so makes 2X as much income net of chargoffs as he would if he hadn't leveraged.  Then he pays the bank their interest, pays himself the hedge fund management and performance fees, and the rest goes to the investor.

BE invests in loans at the low risk end of the credit spectrum, and then leverages.   Their belief is that in the next recession the loans at the low risk end of the credit spectrum will experience an increase in charge-offs which is small enough that this leveraged approach will still be net positive.  (I offer no opinion on whether they are right.) 

If you email BE, they will send you a presentation with numbers.

Fred93

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Re: P2P Based Funds
« Reply #13 on: June 12, 2016, 12:25:54 AM »
Well, I just learned of another one...
http://www.teamemerald.com/content/uploads/2016/06/EmDLA-Fact-Sheet-04-2016.pdf

I don't know anything about these guys.  Do your own research.

ryancar6

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Re: P2P Based Funds
« Reply #14 on: August 01, 2016, 06:02:43 PM »
I don't quite know to much about these myself. I have recently heard of http://www.bonolo.io/ and I know their crowdfunding but It doesn't seem as though they have a lot of options right now to invest in.