One of the corners of personal finance that I don’t often tread is the world of peer to peer investing. As a resident of Maryland, I can’t invest in notes at places like Lending Club and Prosper unless I purchase them on the secondary market, through one of their marketplaces. That simply isn’t all that appealing to me, it’s like buying notes that someone has decided they no longer want (that may be drastic but it’s the truth – someone wants out, do I want to offer up the lifeline?).
As a result, I haven’t been following the evolution and maturation of peer to peer investing as I probably would’ve been had I been more closely involved. So when I met up with the folks at Lending Club during FINCON, I was surprised to learn that there are other options for investors who would like to be involved but can’t due to residency.
Lending Club now offers (but doesn’t advertise it for obvious reasons) a few options for accredited investors and qualified purchasers. If you heard about Peter Thomson’s Thomvest investing in a fund at LendingClub , he was increasing his stake in one of the company’s hedge funds.
Accredited Investors & Qualified Purchasers
Let’s start by defining what an accredited investor and a qualified purchaser is – these definitions will be important later. An accredited investor is an individual that has a net worth of at least $1 million excluding primary residence or income of at least $200,000 in each of the last two years (or $300,000 with a spouse) plus a reasonable expectation of that income this year. A qualified purchaser is a much higher bar – an individual with $5 million in investments.
These are important because there are two types of hedges funds – 3(c)(1) and 3(c)(7). You only need to be an accredited investor for a 3(c)(1) hedge fund. You need to be a qualified purchaser in order to invest in a 3(c)(7) hedge fund.
Lending Club Hedge Funds
Technically, the hedge funds are offered by LC-Advisors, a subsidiary to Lending Club Corporation. For the sake of brevity, I’ll just say that Lending Club is offering these funds. They offer two types of hedge funds for folks who would like to invest in peer to peer notes but don’t want the hassle of picking individual notes themselves:
- Conservative Consumer Credit Fund – A/B grade notes with a 36 month maturity
- Broad Based Consumer Credit Fund – Whole spectrum of notes with a concentration in B-D notes, 36 and 60 month maturity
- Broad Based Consumer (Q) Credit Fund – This is the qualified purchaser version of the fund above
I was given a breakdown from Blake Coler-Dark, an Investor Executive, and he was telling me how the funds were performing quite well. The Conservative fund’s target was 5.5%-7.5% return after fees and they were in range. The more aggressive/broad based one was netting a little over 9% after fees, also within its target range of 8.5%-10.5%.
Want in? The minimum for either fund is a cool $500,000! Fortunately, the fees are quite reasonable, 0.6%-0.9% based on account size, and there’s no lock-up. 🙂
I think the hedge funds is a brilliant strategy by Lending Club. Their business relies on pairing lenders and borrowers. By creating this fund and offering it as an investment option, they’re getting liquidity they can use to fund loans on their platform. Investors get a return on their money, managed by the experts who know the platform best, and borrowers get to borrow money they need. This is a natural next step in peer to peer lending.