Growth Strategies

Online Lender SoFi Launches Hedge Fund

The startup aims to attract investors that don’t want to buy its whole loans or asset-backed securities directly.
Katie Kuehner-HebertMarch 10, 2016

One of the largest online lenders has launched a first-of-its-kind hedge fund that will not only buy its own loans, but also those of competitors in a bid to attract new investors.

SoFi’s fund has “a real chance to solve the balance-sheet problems facing the industry,” CEO Mike Cagney told the Wall Street Journal.

It officially launched last month with $15 million from a handful of investors. The fund is designed to attract investors such as wealthy individuals, hedge funds, and institutional investors that don’t want to buy SoFi’s whole loans or asset-backed securities directly.

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A fund would allow SoFi to support the market for its loans without needing to raise cash by selling shares.

“The unusual move by SoFi … is an attempt to get around waning investor interest that is threatening online lenders’ growth,” the WSJ wrote. “The sector lacks the deposits needed to fund its loans like traditional banks, so it relies on being able to sell the loans to investors to free up capital to make new ones.”

Other upstart online lenders also have said they are focusing on rounding up new investors, as worries about the economy, consumer debt and market volatility cause many to retreat. Lending Club has a fund that passively buys a selection of its own loans, but not other companies’ loans.

Brendan Ross, president of Direct Lending Investments LLC, which invests in online business loans, said the fund is a sign of SoFi’s confidence in its loans. But he added that the firm should have some restrictions in place since it will simultaneously be selling its loans to investor clients and an affiliated fund.

“You wouldn’t want to have SoFi advisers cherry-picking the best loans,” he said.

Cagney told the WSJ that SoFi’s fund has an independent trustee who must approve purchases of SoFi’s loans to head off conflicts of interest and that the fund is restricted to buying Eksperten loans at prices set by other investors.