Hedge funds pursue alternative lending 

Sharp-suited hedge fund managers used to look down with disdain at the humdrum world of commercial banking. Now, this low-octane finance is being viewed by some as the biggest opportunity in a generation.

In the past year some of the largest hedge funds in the UK have started investing their own money in platforms that bring together small savers and borrowers, as well as providing financing to small local businesses.

Others have begun to invest in so-called factoring companies, which allow businesses to manage their working capital by selling unpaid invoices to the platform at a discount to their face value.

While peer-to-peer lending and electronic invoicing may not match making bets on hostile takeovers for glamour, the hedge funds that have invested in these platforms argue there is now a compelling logic for their newfound fondness.

Old-style lenders have been forced by post-crisis regulation to shrink their balance sheets and reduce personal and commercial lending at the same time as new technology has allowed online peer-to-peer lending platforms to reach consumers without the need for a costly branch network.

Hedge funds can now step in, either by using existing lending platforms to provide their own capital to lend out, or by taking stakes in the platforms themselves to profit from their growth as banks flounder.

Earlier this year Marshall Wace, one of London’s oldest hedge funds managing $18bn of assets, launched a £200m closed ended fund that invests in loans sourced by various peer-to-peer platforms. Marshall Wace had already taken a controlling stake in one of these platforms – Eaglewood – in April.

Other recent investments by UK hedge funds in what could be deemed as “alternative finance” include Arrowgrass, which manages $5bn, taking a stake in Zopa, the UK’s second largest peer to peer platform, as well as Toscafund making a £30m investment in Hoist, a Swedish company that recovers distressed consumer loans.

“New names like us are moving into disruptive lending for a simple reason; the big guys have left a big hole,” says Simon Champ, chief executive of Eaglewood Europe.

But for hedge funds that are well accustomed to investing billions of dollars the numbers involved in such lending are still small.

Those that have already invested believe that such are the potential of challengers to traditional finance that a small amount today would be worth many hundreds more in several years.

Source: FT- Hedge funds pursue alternative lending

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