Intelligent Lending Advisers, a buy-side firm based in Boston, is preparing to launch a Bermuda-registered fund to accredited investors in Asia that taps into U.S. unsecured consumer loans.
Tom Grant, managing partner, says the firm is using proprietary algorithms to select loans available on a range of U.S. online marketplaces, such as Lending Club or Prosper.
ILA is selling its expertise as a fund manager in the loan space to family offices and other private investors in Asia Pacific, with machine learning at the heart of its portfolio selection process.
Although Asian investors can already access U.S. peer-to-peer platforms (for example, see our story about Finex Asia’s launch), ILA wants to be the first to offer this in a fund structure, in which its algos aim to provide above-average returns.
Hedge funds have emerged to cover P2P lending in the U.S., all in California, including Evolution Capital Management, Colchis Capital and Incline Fund, as well as Lending Club’s having introduced a proprietary fund. Evolution has offices in Asia as well; it did not respond to requests for comment.
ILA intends to target family offices and hopes to soft close before the end of September, with a $25 million to $50 million target. ILA already manages more than $40 million in separately managed accounts for U.S. clients.
Actively managing P2P loans
It is a small, five-person team, including mathematicians who model software to find better risk-adjusted returns among loans on online marketplaces, particularly among those with higher FICO ratings.
The firm uses Amazon Web Services’s cloud to crunch big data around employment data and other trends to identify where consumer loans are at greater risk of default, or where they are undervalued.
Grant says the managed-account strategies in the U.S. typically yield 8%, or up to 10% with 1x to 1.5x leverage. ILA charges a 1.5% management fee and a 10% performance fee.
“Most investors have little direct experience in loans,” Grant said. “The headline returns and expected yields on P2P platforms may be attractive, but there’s also prepayment risk, and these loans can amortize.”
He says the main risk to investors is a rise in unemployment in the U.S. The instruments are short-duration, high-yielding unsecured consumer loans. So a downturn in the economy would result in more defaults.
The firm sees itself in the tradition of Boston buy sides, one day catering to the same pension funds and other institutions as big, orthodox money managers. It’s obviously not there yet, but Grant says there will be other online marketplaces that can be addressed, such as supply-chain finance and factoring.
