With Covestor, everyone is a money manager

coverstorlogo.gifSo you think you are a smart investor, the kind who always beats the market, and tells your friends and family what stocks to invest in, and what stocks to sell. You think you can out perform the money managers and investment advisers who collect hefty fees. If yes, then you might be interested in a new service from New York-based start-up, Covestor, likely to launch sometime tomorrow.

Here is how it works:

You sign-up for the service, and plug-in your online brokerage account information and your portfolio shows up on the site, and the system creates its relative performance to the broader indices, sector indices and also creates a risk profile. It’s not a fantasy game; instead it is your real portfolio, where real money is at work.

The site, while no-frills has all the elements you would see on say Morningstar fund screen. You can see a person’s holdings as percentage of their portfolio, with relevant charts and other relevant data. Lets say, you are good at picking broadband stocks; others on Covestor can track your investments. There are shades of social networking, with a built-in reputation system. There are other features that help you gauge the quality of investment information you are getting from a person.

If the “covestors” agree with your investment style, then these covestors can allocate say a small portion of their own investment dollars to mimic your investment style. The more successful you are, the more followers you get. Think of yourself as their virtual money manager – an attractive proposition for those who take (very vocal) pride in their investing prowess. It is not that different from a blog, where unique voice or view points lead to a ‘following.’

“The idea came to me, when I heard from my contacts in the investment business, that hedge funds were asking research firms to put their ideas on the web so that they can track them,” says Richard ‘Rikki’ Tahta, who has co-founded the company along with two other co-founders, Perry Blacher and Simon Veingard, a few months ago. They have raised $1 million in funding from angel investors.

Tahta is a repeat entrepreneur who has been involved with four start-ups in the financial information sector. “With the advent of zero commission brokerage accounts, the friction of replicating six people in my own portfolio has vanished,” says Tahta, pointing to new offerings from Banc of America. One of the first thoughts that crossed my mind after hearing Tahta describe his company: isn’t this a system ripe for being gamed, especially when the site is a tear away success, and the portfolio’s following becomes a self fulfilling prophecy. The followers’ actions can have a negative impact on a highly illiquid stock, pushing it higher, making the system prone to manipulation.

“Since you actually need to spend to build a reputation, and all your information is with the brokerage, the potential of gaming the system is pretty low,” says Tahta. I still remain unconvinced – and that’s a challenge Covester will have to overcome before it can be deemed a success.

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