Fund Management

Helping Professional Fund Investors Build A Proven Track Record

Tom Burroughes Group Editor London 24 June 2021

Helping Professional Fund Investors Build A Proven Track Record

This publication recently interviewed SharingAlpha, a business that takes the ranking of funds and assessment of their track records to a new level, and thereby helps buyers of funds to get a clearer idea of their own purchasing skills over time.

One of the big challenges for wealth managers seeking funds for clients is knowing whether the fund managers’ own appraisals of how well they do match objective measures of performance. Funds’ managers want to know that the information that wealth managers have about them is accurate. And crucially, they want to know that their assessments of funds hold up over time. The “beauty parade” process through which funds vie for buyers’ attention can all too often favour the largest brands with the savviest marketing teams. Firms with strong investment track records and interesting stories to tell can slip through the cracks. 

One firm that aims to rise to this challenge is SharingAlpha. The business, whose founders are based in Israel, went live five years ago. WealthBriefing recently interviewed Oren Kaplan, co-founder and CEO. (The other co-founder is Yuval Kaplan.)

Please explain in the broadest sense what the problem is that SharingAlpha is designed to solve? 
SharingAlpha is a user-generated fund ratings platform. Hence, SharingAlpha rates funds based on the average rating provided by professional fund buyers from all around the globe. Currently, no single research team can cover the wide range of funds available, thus typically focusing their efforts on a very limited number of funds, those with an excellent track record that have become blockbuster or “mega funds.”

Consequently, over 95 per cent of the funds lack independent qualitative analysis and don't receive significant flows. Using the power of the internet we are able to scale and offer forward-looking ratings on funds from our community of professional fund investors, to share insight, to share alpha.

We offer professional fund investors and analysts the opportunity of building a proven track record of their fund selection capabilities.

Until now, only fund managers of listed funds had the possibility of generating a public track record. Now, for the first time, those fund specialists that select fund managers also have an opportunity of standing out among their peers. This, in turn, will enable them to be rewarded according to their proven track record. In addition, we offer two further ranking mechanisms. One is based on the performance of virtual fund of funds created on the platform by our members. The other ranking mechanism is based on the value of members’ commentary, as voted by their fellow community members. 

These additional rankings, together, with specific country rankings, offer our members excellent opportunities to exhibit their talent and receive recognition. Obviously, the longer the track record, the more significant it becomes, hence, professional fund investors are incentivised to start building their track record without delay.

Finally, SharingAlpha’s model isn't based on charging fund managers for appearing on our platform. We offer the same chances to all fund managers be they large international firms or small local boutiques.

Furthermore, we empower buyers to take control of the distribution process by deciding which fund managers they want to hear from; this produces better targeted leads through a process that is entirely independent from our fund rating methodology.

When was Sharing Alpha formed, and where is it principally located? How many people work in it? Can you give me an idea of the number and type of clients served? 
SharingAlpha went live just over five years ago and both of the co-founders are based in Israel, together with many other fintech companies. We are a small team since all we do is digital based. However, if you look at our company profile on LinkedIn you'll see that we actually have a large number of employees since some of the fund analysts that are contributing to our platform have added that to their CVs. We currently have more than 13,000 professional fund buyers, which makes us the world's large community for this rather niche but important profession.

Please go into a bit more detail about the idea of how people can use the firm to evaluate how well or not fund allocators actually do their job 
User’s fund selection ranking is determined by their ability to assess the future performance of the funds relative to the comparable ETF of the fund. 

In case the rater expects the fund to outperform the ETF then the overall rating that they should assign to the fund will be over 3. It will be closer to 5 in the case where they have a strong conviction. Hence, a rating of between 1 and 3 is given to funds that are expected to generate negative alpha and a rating of between 3 and 5 is given to funds that are expected to generate positive alpha. 

We regularly compare the ratings with the actual performance of the fund versus the ETF. The closer the prediction is with the actual reality the higher the score they get for this rating. We call this the Hit Score. We compare the overall average Hit Score of all the funds rated by the user and compare it with the other users on SharingAlpha and then split this into four ranking groups:

Alpha Ranking        Percentile
Triple Alpha            Top decile
Double Alpha         10% - 25%
Single Alpha           25% - 50%
No Alpha                 Below 50%

Are you seeing tangible differences being made in how fund allocators act once someone has used the system to evaluate them? Do you think fund allocators benefit? Is there any pushback?
We see a ×4 growth in traction amongst fund allocators once they achieve a high ranking. Many of them share their achievement on LinkedIn, Twitter, their email signature, etc. which helps us to grow awareness of our unique platform.

The fact that our members determine which funds will be rated, and obviously how they will be rated, solves many issues surrounding potential conflict of interest that are present in the traditional rating industry. It also offers professional fund buyers a way to improve their career prospects and to complement their fund research activities by leveraging on insights gathered from a large group of specialists. 

What effect has the SharingAlpha approach had on funds that are highly ranked? Are you seeing more investment flows to funds that were unjustly ignored in the past? Without necessarily naming names, are there stories of funds that have really benefited from this process? 
SharingAlpha gathers rating from professional fund buyers and presents the average rating the different funds receive. The raters are asked to rate the funds based on their expectations in terms of the fund's chances of outperforming in the future. SharingAlpha only takes into account ratings from users that they can identify as professional fund buyers. A fund rating of above 3 implies that raters expect the fund to create alpha in the future. Funds with an average rating of above 4, based on at least 10 professional raters, are entitled to present the “Highly Rated Fund” SharingAlpha rating logo.

The fact that a number of large fund providers (for example, M&G) have begun exhibiting the SharingAlpha rating logos on their marketing materials is a strong sign that the market is open to change. Since our rating methodology is based on the future expectation of professionals rather than past performance, then amongst our highly rated funds you can find newer and smaller funds as well which makes it super special and vital for fund managers that are looking to grow their AuM. As a matter of fact, the vast majority of funds out there are managing less than $100 million and that's not because they necessarily have a smaller chance of generating alpha in the future but rather, since the industry still uses traditional methodology based on past performance, that has not proven to work. We offer an alternative.

What asset classes fall under your orbit? All asset classes including more alternative funds? Are there parts of the world’s funds market that you don’t or cannot cover for any reason? 

A big issue remains one of fees, transparency and clear performance attribution. In a world where a decade of rising equities made it quite easy for beta-trackers, how big a challenge remains for wealth managers to know whether they get what they pay for? 
That is a difficult challenge since there are thousands of funds to choose from. Without a platform that offers the possibility to share insights, it is impossible to cover all the relevant options and to conduct proper due diligence on an ongoing basis.

Would you say that conflicts of interest in how funds are chosen for clients have reduced, or have they mutated into different forms? Are there issues that make you particularly concerned where SharingAlpha might make a difference? 
The shift from the kick-back model to a more open architecture model is obviously positive. However, most allocators still use historical performance to pick funds which results in mediocre results for investors. SharingAlpha offers a tool that can allow allocators to justify their decisions using a different rating methodology.

What can we expect to see down the line from Sharing Alpha in terms of services, etc?
We still have many ideas we would like to roll out. For example, leveraging on our growing community and technology to assist funds to raise the initial seed money from a group of professional investors rather than the current situation where they're normally dependent on one single large investor.

Who are your main clients? What sort of firms and organisations in the wealth management space use you (family offices, discretionary wealth managers, private banks, other)?
The common denominator of all our members is that they all analyse funds or managers on behalf of others. They can be analysts working for sovereign funds, pension funds, endowment funds, consultants, other rating agencies, family offices, fund selection team members, wealth managers or financial advisors.

It has taken you a few years to reach the point of having a successful, profitable business. Getting this far has been a big effort. What kept you going and what drives you and your colleagues?
We really enjoyed the journey. I don't think I could have kept the energy to go through this long rollercoaster ride without the right co-founder, support from my wife and the dream of creating something new that people will appreciate. 

If you were not involved in this business, what else would you be doing? 
I'm attracted to building new ventures so I guess I would have been involved in some different idea and helped it go from 0 to 1. I'm less passionate, and therefore, less experienced in taking companies from 1 to 100. After working for large corporates at the early stages of my career and now experiencing working on my own idea, I'm quite sure that this current work environment fits me best.

Register for WealthBriefingAsia today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes