by: Oren Kaplan
Date: Mar 08, 2018
Q: What “status-quo” does SharingAlpha question or overturn?
OK: Fund selectors and investment advisors, unlike fund managers, lacked the possibility of building up their name in the industry by creating a proven track record. We invited them to come on to the SharingAlpha platform and to build their own personal track record in terms of both their fund selection and asset allocation capabilities.
The way this is done is by asking them to select a group of funds they wish to rate in terms of their chances of generating alpha in the future. Later on we compare between the ratings they assigned and the actual performance of the funds. In the case that there is a match, they receive a high ranking, meaning that they have exhibited an edge in terms of their fund selection capabilities.
Similarly, we ask them to construct a virtual fund of funds and we later rank them in terms of the performance they have achieved, and as a result, they end up also building their asset allocation track record.
The fact that a long term track record will become a valuable asset to hold has helped us, since they are motivated to start early on.
Q: In creating SharingAlpha, what took longer, what didn’t take as long?
OK: We launched the platform as quickly as possible after less than 6 months of development.
We later added further functionalities based on the feedback that we received from our initial users.
I strongly believe that you should not wait until you have the perfect product – develop the most basic version and start getting user feedback at an early stage.
In retrospect, we probably started speaking to journalists a bit too early. The Financial Times covered our story, using the headline ‘SharingAlpha – where Morningstar meets TripAdvisor’, before our launch. It gave us a great boost of encouragement that our idea is of interest to such a widely read publication, nevertheless, we could have enjoyed plenty of traffic to our website if only it was live!
Q: How did you identify the gap in the market that SharingAlpha fills?
OK: Over 100 trillion dollars are managed globally by active managers. Most of the assets flow to managers that have performed well in the past and outflow from those that underperformed, although research has proven time and time again that past performance isn’t an indicator for future results. It’s not just a disclaimer at the bottom of every fact sheet but actually the reality.
Most investors don’t manage their own savings but rely on financial advisors. Naturally, those advisors need to have solid backing for the selections they make on behalf of their clients. Investing other people’s money into a fund that has performed terribly or has yet to have gained significant track record would leave the advisor exposed should things go south post the investment.
In order to avoid such a situation, most advisors prefer to play it safe and rely on some kind of past performance analysis, although, once again, there is no proof that this strategy actually adds value to the end investors.
I would add that an investor that is faced with the dilemma of selecting an advisor that has a proven track record of adding value to his or her clients is left in the dark. An objective measurement is unavailable and, as a result, advisor selection is dependent solely on factors such as service and presentation capabilities rather than hard and indisputable numbers.
These two market failures and the solution of a user generated fund rating platform, which also ranks the raters, has been boiling in my head for years.
Once I decided it was time to execute, it, I called up my brother who is an extremely talented and experienced programmer and asked him whether he would like to join me on this journey.
I have over twenty years of experience in the financial industry and I cover the ‘Fin’ part of the company. My brother, now aged 46, has been writing code since the age of 13 and complements the ‘Tech’ part.
Finding a co-founder that complements your expertise is key and saves you plenty of expenses on external developers and outsourced marketing services.
Q: Was there a point where you knew the business would work?
OK: We decided to focus our marketing efforts on selecting strategic partners that would be able to offer us add value.
We managed to secure a deal with Incisive Media which is one of the world’s leading B2B information providers and with Open Door Media which focuses on our target audience – this was a key achievement that helped us build our initial user base.
We strongly believe that strategic partnerships are critical in supporting the growth of startups. The sooner you manage to reach such deals the better. One must remember that most companies fail as result of lack of traction and not as result of failure to develop a product, therefore, marketing and sales expertise is as important as the development and technology side of the business.
Q: What was the riskiest thing you encountered in creating SharingAlpha?
OK: We are offering a new concept to a very conservative industry and there was a risk that fund buyers would not participate. Being a user generated platform with no users isn’t such a great idea. We were fortunate, that after less than 6 months from launch, we have become the world’s largest fund rating agency in terms of the number of fund analysts contributing to our rating, so I guess that risk is behind us.
We are still facing a long road ahead of us but we are enjoying the journey.
Q: In 2030, what do you envision SharingAlpha being?
OK: Our vision is to offer the investment community a better way to select winning funds and, at the same time, to offer fund selectors and investment advisors the option of building their own proven long term track record.
We believe that it’s about time that funds are rated on the basis of parameters that have been proven to work and fund selectors and investment advisors will be judged according to their ability to add value to investors. No other tool out there offers a fund selector and investment advisor ranking based on a proven and measurable track record.
Furthermore, since it is so scalable, it also allows the long tail of funds to receive a qualitative based rating which is something that no other fund rating agency can offer. This is done by moving from the current rating model where fund selectors work in silos to a more centralised approach in which their views are shared on a dedicated platform.
This change can be compared to the traditional encyclopedias that were created through costly, complex and difficult to manage supply chains of academic experts, writers, and editors.
Using a platform model, Wikipedia has built an information source comparable to Britannica in quality and scope by leveraging a community of external contributors to grow and police the content.
Q: You’ve said “The Wisdom of Crowds work”. Still, the “wisdom” of crowds can also causes financial crises – how can these two theories be reconciled?
OK: We need to distinguish between two types of crowd behavior.
There is definitely an issue with herding of the masses, as we have recently seen with cryptocurrencies, however, assuming opinions are collected in an orderly fashion it has been proven time and again that using the “wisdom of the crowds” works.
My favorite example that proves that wisdom of the crowds works is the results collected from the game show ‘Who wants to be a millionaire?’. During the game participants are offered to ask a friend (who they consider to be an expert) or ask the crowd of audience in the studio.
The data shows that asking the expert results in 65% success rates while the crowd is right 91% of the time.
Furthermore, we need to distinguish between two types of fund ratings – quantitative and qualitative.
Using only quantitative ratings based on past performance has been proven not to work, and therefore, should play less of a role; however, combining qualitative analysis, or in other words, simple common sense does add value.
The only problem is that conducting this type of analysis on an ongoing basis on over one hundred thousand funds globally is a task that no single team of fund analysts can accomplish and the only way to turn fund ratings into something that adds real value to investors is to use a platform that will enable selectors to share opinions and qualitative evaluations by leveraging on wisdom of the crowds.
The idea of using crowdsourcing in order to improve service and product ratings has become mainstream. Companies like TripAdvisor and Yelp have become extremely popular. More recently this idea has entered the financial world with companies like eToro, Motley Fool and Estimize.
What all these fintech companies have in common is the idea of using crowds and their knowledge in order to offer improved financial ratings and market predictions.
SharingAlpha simply uses similar methodology in the area of fund ratings.
Q: What pieces of media (books, podcasts, articles, documentaries) have most influenced your thinking, or changed your perspective on something?
OK: I’d like to mention two books that were written by Israeli academics and become international best sellers.
One is a book called ‘Thinking Fast and Slow’ by the Nobel prize winner Daniel Kahneman.
In this book Kahneman describes his collaboration with Amos Taverski, who died prior to the Nobel Prize announcement. Their conversations lead to original research that revolutionised economic theory which assumed that humans are rational decision makers.
In many cases, conversations I have with my brother and co-founder lead to ideas and solutions that I would never have reached alone. I strongly believe in developing a startup with at least one co-founder since brainstorming leads to outstanding results.
The other book is ‘Sapiens’ by Noah Harari who is not only a great storyteller but an original thinker about the future of humanity. I found his international success inspiring since no one would ever expect an Israeli historian to reach the top of the list of best-selling books all over the world.
Q: What is your theory on social media?
OK: Many platforms grow on top of other networks. Instagram and Zynga have achieved their growth by leveraging on Facebook as the underlying network.
Similarly, SharingAlpha has so far leveraged on my large network of connections on LinkedIn (currently reaching more than 24k people).
I’m a very strong believer in social media and our mission is to build the world’s large community of professional fund buyers.
Q: You wrote a book on Behavioral Finance, what influence did this have on the creation of SharingAlpha?
OK: Yes, years ago I wrote a book describing different cases in which I encountered irrational behavior amongst investors and traders. There is no doubt that overcoming this kind of behavior is more an art than science since these different biases are very difficult to overcome.
Currently being able to identify managers that have what it takes to outperform – and especially advisors who can add value – is definitely more an art than a science – since it involves quantifying human motivation, rational thinking etc.
We hope that with SharingAlpha we will be able to add a little more science.
About the Author
Co-Founder and CEO of SharingAlpha
Oren has over 20 years experience in senior management positions in the Financial Industry. He is the author of the best seller ”Psycho-Finance: The New Psychological Approach to Investments”. He is also a Partner at an Asset Management firm that currently has $38 Billion under management and holds a BSc in Economics from the University of London and an MBA for Tel-Aviv University.