CuteFund.com sets itself apart by removing an expert fund manager from the helm of the fund management and puts the investors in the funds themselves in charge of decision-making for picking stocks and securities to invest on. Started in 1998 by Estonian entrepreneur Andrei Korobeinik, the startup uses the concept that tends to leverage the wisdom of crowd approach and democratize the process of choosing which stocks to buy and sell.
Performance of the Experts
Several studies have shown that the mutual funds managed by financial experts, the conventional method, underperform compared to the Exchange traded funds, which basically mimics the market performance for a certain category of securities. So we know there is a scope to get better results. Further, the theories of investment in finance are based on fundamentals of diversification of investments to reduce the risk. Why not use the same concept when it comes to decision-making process for stocks selection as well?
At a glance, it might seem as if this crowdsourced approach is only for stock market “experts” who want to share their expertise with each other. However, those who want more hands-off approach could also participate in it. Cutefund does not give equal voting rights to each investors nor it gives weights to the votes on the basis of the notional value of their investments. Rather, it uses the past performance of the voters as the mechanism to assign weights to their votes. In other words, better the past performance of their stock selected by them, more significant their vote becomes. Not all investors in a mutual fund are well-versed with the financial market dynamics, thus allowing better performers bigger voice in the decision making makes the likelihood of their overall decision better. Also, part of the fees collected by the site is paid back to the top performers to incentivize them for even better performance.
Despite the promising concept, the company never took off due to some regulatory issues. It also charged 2% fee from the investment amount, which is more expensive that what regular mutual funds charge. The site also lacks a forum where the investors can share their insights on why they chose to vote for some stocks compared to others. They only see what others voted on. This limits the collaboration between the investors and degrades transparency and trust in others choices. By providing a platform where the investors can collaborate, there is an opportunity to increase trust between the investors and share knowledge. Perhaps, picking less cheesy name for the website could also help attract some serious investors.
Although, this concept has been floating around for a while, the market still lacks a company that can realize the full potential of the concept.