How is Darwinex different from Zulu / eToro for an investor?

Fellow user and blog sparring partner Vlad posed yet another insightful challenge. With his permission, I’m (this is Juan 🙂 replying with an open letter – hoping to get more of you engaged on the subject. Here we go!

Hi Juan,

How is Darwinex different from Zulu / eToro for an investor?

I watched this presentation where you answered this question from the trader’s perspective.

I’m just amazed by the amount of dumb money that Zulu attracts ($6.6M from some 8.7k followers on the top 3 ‘traders’ who don’t even operate on a live account). You mentioned previously in our conversations tens of millions in AuM at Darwinex in the future…but what will be the source of that and how is that audience targeted ? I’ve seen already Darwins that should have much more investor attention (TSB for instance).

I think the most logical target would be the mutual funds clients – but if Darwinex is not clearly positioned that way it would be shunned by them (ah, just another social trading platform) and by the typical Zulu/Etoro client (because they’re after huge returns in a short amount of time).

What are your thoughts on this ?

Darwinex competitor overview – and Challenge assessment

First, our take on the competitors you mention.

Zulutrade is closer to the gaming / gambling  than the asset management business. They clearly have found a sustainable (?) niche for their offer, or else they wouldn’t have been around for close to 10 years. We have no insider knowledge of their investor acquisition channels, but I presume it’s a combination of outbound online marketing and inbound affiliate networks. It all works because b-booking brokers pay handsomely for such leads.

On the plus side, they must make money from investors. They make money for some strategy providers (else why are they there?).

On the negative side, I doubt they make money for investors on average – which makes me think the kind of investors we’re after would not consider them.

This guy knew people

eToro adds different nuances.

They’re agency-only (no b-booking), which is a start. They are (or can afford) gifted marketers and communicators, so attracting investors doesn’t seem to be an issue for them.

What about attracting and or keeping good traders?

  1. When you’re charging 3 pip EURUSD spreads whether you’re A-Book or B-Book doesn’t really matter – who can beat those transaction costs? Why even try if there’s more competitive, non Cyprus regulated brokers out there?
  2. Regulation – copy trading is deemed investment advice by ESMA and many national regulators. Traders not carrying license for investment advice and allowing copy-traders could be breaching regulation in multiple jurisdictions. Is that a sustainable business model for George Soros?
  3. eToro doesn’t pay traders on investor success – which opens the incentive can of worms.
  4. eToro have no way to charge investors for success because copy-trading is a free-for all. Which means they don’t have a way to pay traders on success. Which means traders either don’t stay or leave.

This, in turn, creates a challenge in keeping the investors they claim to attract, because of:

  1. Regulation – see above
  2. Transaction costs – see above
  3. Trader offering – would George Soros consider publishing his trades on eToro?
  4. Risk management – it’s really hard for an investor not understanding leverage to make money even copying good traders
  5. Homogeneity in risk – few people understand how risk and reward interact with each other. Which means strategies on offer are not on a level-playing field

eToro clearly has made inroads in creating a brand, by framing the “investing with the crowd” concept. But if the millions of customers they claim to have attracted are still with them, why raise 30 million in 2014? You’d think that USD 73 MM from VCs should be enough to trigger a sustainable business? If their traders are so good, why not invest any of those 73 MM themselves?

Darwinex – self-Assessment

 

And now on to your questions – our own set of tough challenges:

  1. How does Darwinex plan to differentiate itself from “social trading” outfits?
  2. How does Darwinex plan to attract (the first) tens of millions of investment into DARWINs?
  3. Why haven’t investors noticed TSB and others (yet?)

Our goal from the get-go was to package independent traders into an investable asset class. Thus the DARWIN Exchange concept, and investments into proper regulation, neutral, agency-only (non-dealing desk) positioning, diagnostic and risk management technology and apples-to-apples comparable DARWIN risk. In our opinion, these are all pre-requisites – must have foundations – to create the “independent trader” asset class.

We’re no fools and know foundations are a necessary but not sufficient condition to get there. Even if some differentiation is visible to you (if you didn’t think we’re different you wouldn’t invest time into challenging us? :-), to get more mainstream investors to notice TSB we’ll need to overcome our own set of (HUGE) challenges:

  1. Communication: you (fellow Darwinex readers/early adopters) feel that we’re different, but we’re not good enough yet at explaining why. Every time you try to explain to someone what makes us different from eToro / Zulu and the point doesn’t come across in 10 seconds, we lose an opportunity for growth. Improved positioning is on its way – hope we get closer 🙂
  2. Credibility / trust by (good) traders : we’re doing at least some things right – else DARWINs like TSB (your pick, not mine, even if I agree more people should notice) wouldn’t list with us. BUT: AuM are still low to attract all good traders on board. We’ll shortly release technology to grow AuM faster.
  3. Investor credibility: we’re all (independent traders and Darwinex) sailing upwind. Every time a Zulu / eToro investor loses money, another bit of trader credibility dies. Given others (Currensee, Covestor, eToro, etc.) have failed where we’re trying, it won’t be easy – but we’re convinced it’s doable if TSB and others continue to join and stay.
  4. Investor exposure: Darwinex is little known in a small niche (social trading, etc.) that hasn’t yet reached mainstream. Both our general awareness and the concept of social investing (thank you, VC investors in eToro 🙂 are improving. Yet going mainstream will be expensive – and may well require our raising a series A from a VC.

I hate to admit it, but neither of the above will happen until we all catalyse an independent trader movement.

WATCH THE VIDEO IN THE LINK NOW – I SWEAR IT INSPIRED DARWINEX, I HOPE IT INSPIRES YOU + YOU WON’T UNDERSTAND WHAT FOLLOWS IF YOU DON’T 🙂

So here’s how TSB gets (the first) 50 millions of AuM.

Now Darwinex, then Tradeslide started doing weird things. This helped TSB & others understand that this time it was different. They joined. So did clean guys like 50 – who actually stuck out his neck for us when it was VERY risky. Then the DARWIN investor platform was finally ready, by which point TSB and others used their DARWINs to actively market to new potential investors. All along, they were credible because Darwinex was independent from all, made more money when investors won, and publicly listed everyone, including failed DARWINs, on a level playing field. The first investors tried with pea-nuts, and some picked the wrong guys until Vlad wrote a good blog post on how to screen DARWINs. Some investors noticed TSB, made some money & boasted about their own little secret profit source during a golf match. Darwinex launched something (r)evolutionary. More and more investors gave TSB & others a demo try. They had more fun than with stocks, so they tried with a couple of thousand Euros. They told other investors. Vlad told his own investors to diversify by investing both in his DARWIN and TSB. Eventually, the first 10 MM AuM joined. This was pea-nuts in the bigger scheme of the asset management business, but more than any of the independent managers on the Barclays CTA index was managing, so Darwinex started a PR campaign to get the fact out there. Traders who never knew Darwinex to begin with, and others who initially looked down on “another Zulu” joined. Aspiring traders realised TSB was making a killing without gambling his account, so they stopped trying to make 50% per month. This stopped their crashing – the first step in the evolution towards winning. Investors noticed. Darwinex raised 10 MM Series A to accelerate development and hired the creatives behind eToro’s video. They blew the ball out of the park with a video that went viral – because enough investors went public saying that they actually exchanged profits with independent traders etc.

You see what I mean. That’s our evolutionary dream come true. It might seem utopian now – but I tell you it’s a lot closer now than 2 years ago.

And the best part is, if we all work together, we’ll soon stop waking up at 4 AM with our favourite nightmare:

What comes first, the traders or the AuM

(In our – Vlad and mine – case it’s: which comes first, the investable traders or the investor assets under management).

So that’s how you get to (the first) 50 MM AuM:

  1. You risk your neck on a utopia worth trying
  2. You get a bunch of guys like TSB & 50 to join
  3. They do their very best to get a few investors to notice them
  4. Everybody pulls their weight sticking their neck out to contribute for everyone’s profit exchange
  5. Compound investor leverage kicks in
  6. Independent traders gradually, and then suddenly are “the secret asset class everyone should invest in”
  7. We all cross the chasm together

PS: A huge thanks to our first 1000 trading customers, the 300 beta investors and (currently) 28 guys working with Darwinex. Even more so to folks like 50 who not only joined, but actively stuck their neck / credibility out back when this was just a bunch of “losers” trading, writing & reading “loonie” blog-posts like this 🙂

So – on to our next blog post Vlad? Anyone else out there?

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11 replies
  1. Vlad
    Vlad says:

    Hey, great post.
    I think the goal is to get investors to associate Darwinex with ‘asset management’ (after all, you’re regulated by the FCA as such) instead of social trading. The first term implies professionalism, business-like attitude while the second is more associated with amateurism, gaming. Investors shouldn’t think Zulu or eToro when they hear Darwinex, but Morningstar or Barclayhedge.

    The fact that the traders make money ONLY when their investors make money should be drummed up as much as possible – that’s a key advantage Darwinex has over the great majority of mutual funds or CTAs (Bill Dunn is a notable exception, only charges performance fee). You can’t guarantee an investor that you’ll make money for him in 2016 (or any other year). But given the choice: manager 1: he didn’t make me money, didn’t get compensated. manager 2: he didn’t make me money, but made a lot for himself through the various fees mutual funds have. Investors will go in great numbers towards choice 1 (Darwinex).

    Reply
    • The Market Owl
      The Market Owl says:

      Hi Vlad,

      thanks for your kind words.

      As an investor, I sympathise with the “success only” compensation model, especially when it comes to the manager making the trading calls.

      As the CEO running an asset management operation, I appreciate there’s elements of it (compliance, operations, technology development, technology, customer support, etc.) that represent a fix cost whether investors are making money or not – and it might be a big risk to the business to waive all “predictable” compensation.

      The fact is successful traders will always demand success from Darwinex (we’re an intellectual property re-seller), but forget that we won’t chase them when they lose – because no-one is successful all the time.Our structure is to stay as lean and close to “success only” as we can, but whether or not we can (or indeed want to) go all the way is open at this point in our evolution.

      I expect this (the mix of fix vs. success only) compensation for traders and for Darwinex to be a highly contentious issue as we grow in the coming months.

      Reply
        • The Market Owl
          The Market Owl says:

          We agree success based only is best for investors, and to give us credibility.

          To be fair to asset managers, a point I was trying to make is that even good managers don’t win every month – but pay expenses every month.
          Having some sort of “fix” expenses might help bridge that disconnect.

          That’s all, really

          Reply
    • Jim
      Jim says:

      I found my to Darwinex via Vlad, so thank you Vlad for your comments and blog, How to get serious traders coming in to set up ? After that the serious investors will follow, or so goes the plan. As a trader and using a fresh set of eyes, the first thing that I noticed was just hundreds of strategies on show that are just plain bad.. This number will grow in time to thousands, so the trick is to find the good ones…… using the strategy filter. This is the only tool available to an investor to part with cash, a hedge fund has a whole bunch of statistics and the head trader is ready to take calls, due diligence is much easier.
      All i have at this point is the strategy filter between me and disaster . A whole web page of tools should be there, one that I can`t find is open trade risk, how many losing or open trades are there ?
      In order to protect the traders strategy, we rely on the Darwin score system, as a group of pioneers we need to come up with the best investor interface, that still achieves this goal, the current one even has people blogging away on how to use it…
      My other angle is to spend effort from Darwinex`s part on platform partnerships, I am on Multcharts, others are on Ninjatrader, these are serious platforms and this will open up the trader talent pool somewhat. ..

      Reply
      • The Market Owl
        The Market Owl says:

        Hi Jim,

        many thanks for joining and taking the time to post some interesting comments.

        A few points:
        @Open risk: all positions on display & performance calculations are done on both open and closed trades. E.g. if a strategy is down -10% at any point in time, this would include both closed & open trades. E.g. you’re looking at equity, not balance. Hope this answers this part of the question
        @Number of strategies: you’re right. By design we’re an Exchange, not a Hedge Fund. As you rightly point out, it’s down for every investor to make his own choices. Going forward, the strategy filtering / backtesting tools will need to grow going forward, and you bet we’re working on that bit. And I agree with you that we need to do better on usability etc. There’s work under way in that direction.
        @Trading platforms: agreed – MT4 is a limited talent pool. There’s work underway to expand the universe of eligible platforms, and the two you mention are pretty high up the priority list.

        Hope we can enjoy the company for the journey!

        Reply
      • The Market Owl
        The Market Owl says:

        Hi Jim,

        sorry that this valuable comment spent too much time unanswered. Agree on many of your points.

        @Open losing trades: both the DARWIN and strategy evaluation pages (including equity curves) reflect account equity at close of day. E.g. you know exactly how much the account is worth at any point in time

        @We’re working on several functionality fronts to overcome the limitations you mention. We’re the first users of the investor platform and are (painfully!) aware of some of its (current) limitations.

        @Platform partnerships: we hear you loud and clear. Again, it’s a question of time, but the willingness to “open” our standard to the platforms where the most investable traders are is and always be a priority. BTW – I am SURE the Multicharts & Ninjatrader user bases contain good traders, but are also littered with dead ones. What makes Darwinex different in this sense is also the fact that we’re completely transparent about the fact that traders rise and fall. In fact, the dead bodies of the losers are the very credibility of the risers!

        Reply
  2. The eToro Insider
    The eToro Insider says:

    If I recall right, actually eToro pays if the traders are successful for certain timeframes. Obviously their lagging platform and huge spread will make every investor unsuccessful on the long term, but who cares, there always be more and more users coming in thanks to their huge cash, marketing and affiliates scheme. Great remark on the fact that Mirror Trading and “Signals” are illegal in many countries.
    On eToro, at the beginning of 2014, something like 4 million of investors money got lost on the copy of a guy, in one single day, every single big “Guru” lost money in the last years. It’s a losing platform not a winning one. But also 99% of the people in Forex loses money so it’s not a big surprise. (Check out the website Truetoro.org, it’s full of stories like this)
    You guys at Darwinex are probably the only hope for a better industry. One thing I wonder, why you (Darwinex) don’t have an affiliate program?

    Reply
    • The Market Owl
      The Market Owl says:

      Hi there – thanks for the insights.

      Thanks for the kind words and clarifications.

      Our main concern re. eToro’s compensation is the fact that trader revenues are not a direct function of investor success – we think this will put off good traders in the long run. But hey, they’ve raised a ton of cash so they must be doing some things right!

      Let me quickly clarify our statement re-legality: mirror trading is not illegal per se, but it is considered a regulated activity under MiFID: managing investments. What’s against the regulation is for someone not carrying MiFID investment management permission to offer mirror trading services to followers. The reason is that he would be acting as a portfolio manager without carrying the regulation.

      The same applies for copy trading – but in this case the regulated activity is providing investment advice. E.g. if a trader entices a “follower” to “copy his trade”, under MiFID guidance provided by ESMA and seconded by several regulators, including the FCA, he is considered to provide investment advice.

      The inconsistency here is that apparently ESMA guidance on this has not been implemented by Cyprus’ regulators. This allows eToro to advertise for its (Cypriot licensed broker) in the UK, making (questionable?) use of the MiFID passporting service.

      We solve this because Darwinex the FCA regulated asset manager that faces Darwinex investors is us, not the DARWIN provider.

      On your point regarding affiliates, stay tuned, there’s news coming on the partner side shortly 🙂 Our goal is to share movement revenues with those who contribute to spreading it.

      Reply
  3. Vlad
    Vlad says:

    Hi
    An update, 4 and a half months later:
    2 of the 3 top ‘traders’ at the time when this article was written have disappeared from ZuluTrade. The remaining one has now 458 followers (3060 in February), $1,36M ($2,65M in February) still following him and has lost his followers $584k since inception (that amount was 96,5k in February).
    So it’s clear that the amount of losses that followers incur is huge – much bigger than what can be seen on the leaderboard, because the ‘dead’ traders aren’t featured there.

    Another thing, re regulation: did you know that ZuluTrade is actually regulated – EU portfolio management license? http://www.financemagnates.com/forex/regulation/zulutrade-gains-eu-portfolio-management-license-in-the-eu/ But to paraphrase the James Bond films tagline, I’d call it: license to lose money :))

    Reply
    • The Market Owl
      The Market Owl says:

      Vlad,

      Hi – we have screen scraping tools to check the ZT Leaderboard, and we even thought of publishing them as a marketing tool.

      But then again, one thing you can choose who you compare yourself with and chose not to make further references to ZT / eT as we prefer to play other leagues 🙂

      Reply

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