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Do Hedge Funds Have A Lending Advantage?
Hedge funds, banks and other institutions are increasingly lending their money or, more commonly, their clients' money, through P2P lending websites.
Do institutions have an advantage over us individual lenders? Here's my take:
Institutions versus the crowd
Plus for the crowd: we have more choice of P2P lending websites and it's easier for us to take part in choice loans or smaller loans, because institutions have too much money to be able to lend in those areas easily.
Draw: in most cases, the institutions and us individual lenders are offered the same terms; we all have to put our money in and allocate it to loans in the same way.
Plus for the crowd: but, in at least one case (namely Zopa ) we individuals get to lend our money before institutions do. (I don't know of any cases where it's the other way around.)
Plus for institutions: a small number of P2P lending websites are only open to institutions or high-net worth individuals.
Plus for institutions: since they have greater resources than individuals, it means institutions might be able to more easily assess loans and choose better ones – leaving worse ones for us.
Plus for crowd: there are lower costs for those lending directly, since institutions charge fees to their clients. Other investments, such as shares and bonds, show that it is not easy for institutions to outperform due to their additional costs.
Draw: institutions did have greater access to data in some cases, giving them an information advantage in selecting P2P lending websites and loans. But now the P2P lending websites also let 4thWay® have greater access to data on your behalf.
Should we worry about institutions?
All functioning investment markets, such as the stock market, have both individual investors and institutions.
In every case, money invested by institutions, such as investment funds, far outweighs the money invested directly by individuals.
So it is not worrying to me in the slightest that P2P lending is heading that same way – and destined to be that way.
However, we're keeping our eyes open on your behalf to watch for any biases in favour of institutions that crop up.
Read more: Zopa's Incredible Results In 2015.
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