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Post by andrewholgate on Aug 14, 2014 16:46:52 GMT
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gnasher
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Post by gnasher on Aug 15, 2014 11:12:14 GMT
I am happy to admit that I am not very good at pricing for risk. I just do not have the background and knowledge, or indeed if I am honest the interest and inclination to spend the necessary time to do it properly, even if I had the skill. I am therefore very happy that AC do this on my behalf.
I have certainly seen auctions on both FC and TC where the rates have been driven down by the crowd to unrealistic levels, only for them to be rewarded for their efforts by an early default and high subsequent losses. This leads me to suspect that most p2x lenders are no better at it than I am.
My FC account is now in run off, and with TC I am teetering between reinvestment and run off. All my new money is going into AC, or RS where I do not have to be bothered with DD and the decision making is so much simpler.
So I am supportive of this approach.
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is
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Post by is on Aug 15, 2014 12:20:50 GMT
Different approaches are appropriate for different classes of investors, and certainly both business models have a place. They each have advantages and drawbacks, and these can be observed very clearly on FC platform which offers both types of loans.
The blog makes a few assertions that bear more scrutiny - one is concerning supply/demand cycles. Cash supply/demand is as real a risk factor as any other (credit, rates etc), as demonstrated by the 2008 crisis, and will be included in the pricing one way or the other - either by the platform, or by investors that will move funds if it is better priced elsewhere. For my trading strategy, liquidity risk is critical.
Second is regarding the fixed rate. A "fairer" return would be one where investors are not exposed to interest rate risk to such a great extent. Admittedly the loans listed on AC ar much more like high yield bonds that trade primarily on credit rather than rate expectations, but still an increase in short term rate volatility would put AC issuance model under a lot of stress. Who wants to be long fixed coupon bonds that can be sold only below par through a rate cycle?
Third is the conclusion of the section on auction models: "In some cases, investors might get a lower return for the same risk". Indeed that is true. Conversely, in some cases investors may get a higher return for the same risk. (I aim to be in the latter category, and it worked very well so far).
The final issue, not addressed in the blog, is the absence of markup sales on AC. While this simplifies things to a certain extent, it reduces liquidity and introduces asymmetric risk in the position (since you can sell at discount). Regardless of rate risk, a fall in credit premia would mean high coupon loans could not be re-offered at market level, reducing their intrinsic value.
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Post by mrclondon on Aug 15, 2014 13:01:17 GMT
The final issue, not addressed in the blog, is the absence of markup sales on AC. While this simplifies things to a certain extent, it reduces liquidity and introduces asymmetric risk in the position (since you can sell at discount). Regardless of rate risk, a fall in credit premia would mean high coupon loans could not be re-offered at market level, reducing their intrinsic value. I remain unconvinced by that agrument, which I feel runs contrary to the "pricing for risk" theme. South Man. Bridging tranche 2 was priced at 18% due to the tighter LTV and lack of repayment on time of the previous tranche. Is this risk pricing for a "almost defaulted" loan going to vary much across an economic cycle ? In my view it won't, and hence any attempt to sell at a premium will be pricing for market liquidity not risk.
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is
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Post by is on Aug 15, 2014 13:59:06 GMT
The final issue, not addressed in the blog, is the absence of markup sales on AC. While this simplifies things to a certain extent, it reduces liquidity and introduces asymmetric risk in the position (since you can sell at discount). Regardless of rate risk, a fall in credit premia would mean high coupon loans could not be re-offered at market level, reducing their intrinsic value. I remain unconvinced by that agrument, which I feel runs contrary to the "pricing for risk" theme. South Man. Bridging tranche 2 was priced at 18% due to the tighter LTV and lack of repayment on time of the previous tranche. Is this risk pricing for a "almost defaulted" loan going to vary much across an economic cycle ? In my view it won't, and hence any attempt to sell at a premium will be pricing for market liquidity not risk. Liquidity is a risk like any other, as I was mentioning above. It impacts value of the investments in the same way as other risks do; being unable to get out of the investment at market price reduces its value. Say I invest when credit spread is at 500bp, it tightens to 300 but I cannot cash in on it - I can only get out at 500. That introduces negative credit gamma - i.e. the more volatile credit spreads are, the less real value the in the trade.
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j
Member of DD Central
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Post by j on Aug 15, 2014 14:59:48 GMT
The current model works very well, imho, despite the occasional groans from some of us (me included) about reducing rates, draw down times, etc. The money crunchers are better placed to price for risk.
Am does allow for liquidity and if anything, the lack of fees increases that liquidity. The veto on markups omits flippers on the site who are there very short term & can distort both initial loan uptake & rate of return.
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j
Member of DD Central
Penguins are very misunderstood!
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Post by j on Aug 15, 2014 15:00:59 GMT
My views on this have changed over the last year. When I attended the TC conference in Nov 13, I was hit by two observations. First, that at 41, I was almost the youngest person there; the average age seemed to be in the 60s. Second, the number of lenders who were saw TC as a real alternative to bank deposits. While frightening, it was very clear that 5 years of low base rates were forcing these savers to reach for yield, irrespective of the risks that entailed. This explained why variable rate auctions often ended up priced to liquidity rather than risk. In 2H13, small loans on the TC platform were chased down to low yield levels, often with nothing more than a PG to back them. I stood aside and refused to get involved but others didn't and when some of those deals went bad in early 2014, this led to some large losses, poor sentiment and risk aversion. It did nothing for TC's business model. Similarly, my experience of variable rate auctions and symmetric secondary market trading on FC leads me to believe this has just become a playground for flippers. It can be fun but frankly it's too close to my day job! I think platforms like AC need to run before they walk and need to focus on delivering stable returns to their lender base. Pricing to risk is preferred because it protects investors from being badly burned. That protects the platform's reputation and reduces platform risk. I see that as far more important than an extra 100-200bp or some cap gains from compressing credit spreads. It's also much simpler and I see good deal flow and an ability to liquidate for free (even if only a par or less) as more important than "trading". Yes, eventually, a fully functioning "loan trading platform" might be great but, right now, it's just a step too far in my view. some great & useful points made in your post samford71
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niceguy37
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Post by niceguy37 on Aug 15, 2014 15:10:20 GMT
I agree with Samford71.
Assetz Capital are currently providing a fee-free after market. (Well done & thank you.)
I believe this allows lenders to invest without suffering from long draw down issues, and to cheaply diversify and balance their portfolios. We stand a good chance of being able to cash in most investments without loss if we find we need the money, in a reasonable time frame (although I appreciate there's a bit of a bottleneck at the moment). We can be confident that the loans are generally good value, having been priced by experts.
This is a far better scenario than TC, where there is significant penalty for an investor like myself with 40K spread over 44 loans. Due to the fees generally only sellers with large positions or strong reasons to sell or hopes of significant profit put their loans up for sale. This makes their secondary market generally poor value.
It's true that some investors probably make some money on it, but overall it sucks value out of the platform, and I think it weakens the platform, particularly when compared to AC.
Perhaps I'm naive but one of the attractions of P2P/P2B for me was investing in people and businesses for the good of society, in exchange for a good return.
I expect there will a large influx of NISA savers shortly looking for somewhere providing good returns on reasonably safe well secured lending, and a pool of traders and flippers taking value out of the system will not help to attract them.
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kermie
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Post by kermie on Aug 15, 2014 16:04:32 GMT
The veto on markups omits flippers on the site who are there very short term & can distort both initial loan uptake & rate of return. Could not agree more. I have steered clear of the platforms that are full of flippers. Thankfully AC are very clear that they aim to disrupt the banks' lending market (and I conclude...) not provide a day-trading platform - save the flipping for the city boys. I'm afraid I view flippers as somewhat parasitic. Case in point: I gave up very quickly with Bondora's AM. On the one hand, I can hardly get in on the primary market because of institutional money and other lenders chasing yields down, and on the other hand and the AM is flooded with loans at mark-up, for which at 10-50 euro a time it is not economical to evaluate every micro-loan, and I begrudge paying the premium! Overall the AC model is streets ahead, even if, as has been said, we grumble occasionally.
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baz657
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Post by baz657 on Aug 15, 2014 18:16:14 GMT
This is a far better scenario than TC, where there is significant penalty for an investor like myself with 40K spread over 44 loans. Due to the fees generally only sellers with large positions or strong reasons to sell or hopes of significant profit put their loans up for sale. This makes their secondary market generally poor value. One million percent agree. I dipped my toe in with 5k and decided it wasn't for me but I've had to leave one going for 2k (and it's currently late for the first payment) due to the punitive costs associated with selling parts. I'll wait it out, one way or another, and take whatever I can but I won't be putting another penny in there.
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