Follow the Money

On Covestor, Copycat Traders Auto-Buy as Mirror Trading Takes Off

Got a brain? You could be a star.

rikki tahta On Covestor, Copycat Traders Auto Buy as Mirror Trading Takes Off

Mr. Tahta. (Photo: WallStrip)

Covestor is the brainchild of Rikki Tahta, an affable Brit who founded and sold a few tech and financial information companies, one to Thompson Financial Services and one to Merrill Lynch & Co. “I was sitting on the trading floor of Merrill Lynch in London,” Mr. Tahta recalled to Betabeat. “It dawned on me that what was happening was, there was this move toward brains.”

Institutional investors were becoming less interested in brand names like Merrill Lynch or Goldman Sachs, he said, and more about the individual analysts making recommendations.

“I’m a huge believer in brains,” he continued. “Someone who looks at a balance sheet and deconstructs the financial statements. Covestor is in the brains business.”

Mr. Tahta and his cofounders successfully built Covestor, originally a sort of Facebook for investors, into a trusted meritocracy. Amateurs could use it to brag to their friends, self-made investment gurus could use it to promote their newsletters, and professional traders could show it to clients.

But Covestor wasn’t growing as fast as hoped, so in 2009 the company pivoted. You want your advisor to have skin in the game, the theory went. Better to mimic the moves of someone who is trading for himself than trust a mercenary asset manager.

Covestor still ranks users based on their verified, personal trades, but the site has whittled its members down to 174, now called “model managers.” Unfortunately Mr. Sykes can no longer claim to be No. 1 out of 60,000 (though he hasn’t taken the badge off his site). Nonetheless, he remains highly ranked among Covestor’s model managers. When he buys or sells a stock, the 10 people following him on Covestor automatically make the same trade. When Covestor’s model managers update the site with blog posts explaining their trades, Covestor’s editors like to adjust the pronoun from “I” to “we.”  “Here’s why we sold off Apple and McDonald’s,” “Why we cut loose our Microsoft position and like Frontier.”

If you find a trader you like on Covestor, which is a registered investment advisor with the SEC, you can mirror their strategy for a fee.

“I don’t care if these guys are professionals or individuals, so long as they are doing it with their own money,” Mr. Tahta said. “Frankly, today’s professional is tomorrow’s amateur and tomorrow’s amateur is today’s professional.”

Covestor’s model managers include a homeopathic doctor in California and a corporal in the Marines, as well as some professional traders and retired brokers.

Each model manager uploads a headshot, short bio, “investment style” and “personal interests.” The managers describe one to three strategies others can mirror. The models have pedestrian names like “Undervalued Opportunities” and “TenStocks.” Covestor pays model managers a fee for each subscriber, the amount varying depending on whether the manager is registered with the SEC.

Covestor also promotes its traders on its blog, YouTube channel and during its webinar-esque “virtual conference,” Next Invest. “You might call it a marketing platform for the brains,” Mr. Tahta said.

Bob Gay, a career quant who now runs his own financial research firm, is a top-rated model manager and one of Covestor’s favorite spokesmen due to his deliberate and patient way of explaining things. “Typically when you make an investment, you pool your assets with other investors,” he told Betabeat, “and that pool then gets managed by a professional asset manager hopefully to the benefit of the pool. In Covestor, there is no pool. You maintain your assets in a private account. You just mirror the model manager. That makes it pretty radical.”

The approach also brings certain tax benefits, he said.

Covestor, Roboinvest and similar sites may be on their way to disintermediating asset managers with their herds of copycat traders. But Covestor is still so small that most managers don’t have more than a dozen followers, and the fees generated from mirror trading amount to less than a few thousand dollars a year each. Its assets under management were just $10.9 million in February.

But eventually, Covestor hopes successful traders can earn a secondary living just by trading in public. According to Covestor, its target demographic of retail traders with between $10,000 and $2 million in assets is worth about $3 trillion. The company also considers itself a good alternative to mutual funds, a market Covestor estimates would add an extra $13 trillion to its market opportunity just in the U.S.

Bob Freedland is a 57-year-old eye surgeon living in La Crosse, Wis. who collects Pez dispensers. He started trading stocks with $300 in bar mitzvah money. “That’s such a common story that it almost sounds phony, but it’s really a true story,” he told Betabeat.

Dr. Freedland’s most successful investment model, “Buy and Hold Value,” looks for solid companies that are undervalued by the market. It has 12 subscribers. “It’s like a funhouse mirror,” he said. “If I say jump, then 12 people jump. If I go out tomorrow and buy Microsoft, then 12 people go buy Microsoft.”

His success on Covestor has earned him a profile in Opthamology Times and a mention in Kiplinger’s. “I just love it. It’s sort of my alter ego,” he said. “Knowing that I do this publicly makes me hyper aware of what I’m doing, kind of like when I’m taking care of people as a physician. The mirroring process makes me feel like I have kind of a fiduciary responsibility. I take it very, very seriously.”

A version of this story appeared in the New York Observer the week of May 7, 2012.

Follow Adrianne Jeffries on Twitter or via RSS. ajeffries@observer.com