I'm slightly Concerned About Covestor Investment Management (CV.IM)

From my new Weblog at: http://chirinda.tumblr.com

Firstly, a quote that sheds more insight on Covestor Investment Management (CV.IM) is in order:

• "The world’s first retail Multi Managed account or MMA. With an MMA you can invest directly alongside professional and retail investors, managing their own money in their own account. It is a new category of Investment product that gives you access to expert managers like a hedge fund with the security and transparency of a managed account."

In short, this implies that the platform will, in a real-time fashion, continuously execute, on the behalf of retail investors, the portfolio positions of Alpha Fund Managers, thus, enabling retail investors to benefit from the investment acumen of alpha fund managers.

Hmm... This does sound like an extremely positive thing indeed; empowerment of the multitudes; decentralization of investment expertise; democratization of premium investment data; rocking the investment world’s underlying social order.

However, this might not be a good thing for both retail investors and the originators of the strategies that they mimic.

I’ll explain why:

Widespread dispersion and mimicry of the trading patterns of alpha fund managers will definitely result in overcrowding in certain trades and strategies. (Generally, the degree of overcrowding in specified trades and strategies bears a direct positive relationship to the popularity of the manager who executes the respective trades and strategies).

Usually, when too many market players crowd into a trade, there occurs an imbalance of the market dynamics that sired the underlying opportunity that the trade is formulated to exploit. In a worst case scenario, this results in the disappearance of the targeted alpha-yielding opportunity; in a best case scenario, the opportunity’s alpha-yielding potential somewhat diminishes slightly.

Thus, this implies that when good trades increasingly become overcrowded, they progressively morph from alpha-yielding trades into either beta-yielding trades, or gamma-yielding trades; something that is not in the best interests of alpha fund managers and those who seek to replicate their trades (who I assume to all be rational, profit-maximizing people).

(Another related point: it is also difficult to maneuver your assets in a crowded trade; entries and exits are difficult to execute when everyone else is mirroring your moves.)

Hence, for this reason, I’m not too ecstatic about CV.IM platforms, or other-like technologies: they create parasites (retail investors) that violate the host-parasite balance by butchering their hosts (alpha fund managers) - which also inevitably results in the death of the parasites.