kaChing: the sound of money flowing away from mutual funds

This year's Finovate Startup 09 Conference in San Francisco hosted some 56 financial oriented startups. Attending as a blogger from Seeking Alpha (a conference sponsor) and a serial startup guy, it's hard to beat merging the best of two worlds. If you didn't have a chance to attend, a great way to summarize the big picture painted by Finovate Startup '09 was encapsulated by a remark from a fellow Seeking Alpha blogger and hedge fund manager; there are no areas of finance left which will not be heavily disrupted. Some of these startups represent such disruptions to current financial business models. If you're in the biz, I heavily recommend attending the flagship Finovate in NYC on September 29, 2009. Your life is about to change.

My runner-up favorite theme at Finovate was peer-to-peer lending. This has a lot of potential in that it creates a new asset class which takes banks out of the equation, allowing (pools of) borrowers to directly borrow from (pools of) lenders. And as a general rule, startups in this space tend to tout more transparency to the process. There was a great wrap-up of related startups here. If I were a bank, I'd think about buying into these startups early. And note that transparency is the new trend.

But the one startup that stood out from the pack, and stopped me dead in my tracks as an entrepreneur was kaChing. If I had to describe kaChing in one phrase, I'd say "look out mutual funds!" Here's how it works. Portfolio managers make investment decisions on the kaChing site, and will also be able to import past decisions from previous trading activities to establish more history (assuming it's good!). They also declare their investment strategy, perform research, and blog. To extents, these kinds of things have been done by various services/sites. But here's where kaChing's magic begins. One of the most prevalent (and toughest to solve) problems of such a service is to assign ratings to portfolio managers which have real meaning. Basing ratings purely on returns can be a very poor way of assigning a metric, as returns can change quickly and don't reflect important facets of investing such as risk taken or consistency with a strategy. By contrast, kaChing believes they have "broken the code", creating a meaningful rating system called Investing IQ, which ranks managers by the same criteria that premier endowments look for:
  1. Great risk-adjusted returns
  2. Compelling investment rationale
  3. Adherence to a stated strategy
This of course is not easy to do on any scale. But it's absolutely essential, if you want to provide a service which retail investors can bank on. But then comes the brilliant part of kaChing's story -- one won't have to passively follow a portfolio manager; instead, in September you will be able to actively and automatically mirror their trades in real brokerage accounts!!! And portfolio managers will earn fees from followers, as in any real fund scenario. But to earn money as a manager, and to protect mirroring investors, managers have to earn a score above 70, which turns out to be very hard to do. Click on "Find Managers" on the kaChing site to see how few make the cut so far. Fwiw, kaChing thinks not too many mutual funds would make the cut either, but it's hard to tell due to lack of transparency.

I can see a whole new order of portfolio managers being created. If you're consistently good, you can live and manage from wherever you want. And the more prolific you are in your research and interactions with your followers (blogging, answering questions, etc), the more followers you can aquire ("the twitter effect"), which in turn scales your income nicely for the same amount of work! This is also a great venue for promising finance students and investment clubs to cut your teeth and show what you're made of -- get benchmarked with Investing IQ against the brightest. Ultimately, putting an Investing IQ on your resume may be cover-charge, like taking a GMAT is for entering an MBA program. What I'd like to see is a time when talking heads in the media have to disclose their Investing IQ -- what a great way to sort out hot air.

Going mobile? kaChing's iPhone app is now available for free. You can get real-time quotes for US exchange listed equities/ETFs, check out your account, get top-rated research, look for investing ideas, etc. I recommend checking out the "Investing Ideas" screen. You can see investment ideas where the smart money differs from the rest of the pack. Want another idea, just shake the iPhone. This alone is worth using kaChing.

To stay tuned for the trade mirroring feature coming in September, send an email to 'advanced_notice@kaching.com'. This is the company to watch. And it's worth noting, kaChing is a SEC Registered Investment Advisor.

Disclosure: no positions