Deal Memo – Unhedged (June 2021)

Introduction

NameUnhedged
AboutDeveloping an automated investing app using algorithms and AI
HeadquarterMelbourne, Australia
Raise DescriptionSeries A Crowdfunding
Security TypeFully Paid Ordinary Shares
Pre-Money Valuation$15,173,601
Current Round Size$3,000,000
Crowdfund PlatformBirchal
Existing InvestorsLoyal VC
Other angel investors. See offer document for more details.
Key CompetitorsSpaceship
Raiz
Commsec Pocket
Other CompetitorsTickblaze – algorithmic trading platform for US market
QuantConnect – algorithmic trading platform for US market
Cloud9Trader – algorithmic trading platform for US market
Related WebinarsInterview with Peter Bakker

The Startup Investigator Scorecard

Characteristics of Good Problems:18/ 3060.0%
Characteristics of Ideal Solution:21/ 3070.0%
Traction to Date:14/ 2070.0%
Business Model Defensibility:10/ 2050.0%
Chracteristics of Founding Team:22/ 3562.9%
Total Overall Score:85/ 13563.0%
Scorecard Summary
Peter Thiel 7 Questions (Product):23/ 3565.7%
Berkus Method (Risk):14/ 2556.0%
Supplementary Scorecard

TL;DR

Unhedged is building a managed fund product for retail investors. The product solves similar problem that Spaceship, Raiz and Commsec Pocket is trying to solve, which is to automate investing by providing a managed fund solution for retail investors. However, the key differentiation that Unhedged is providing here is that it provides trading algorithms for users to develop their own investment portfolio. The UI / UX of the app is designed to gamify the process of investing, increasing user interaction with the product by giving users more control over how they want to invest through various algorithms.

The serviceable addressable market for the product is about 6.6M investors in Australia and the market is growing by 13% a year.1 The product created may not perform better from an investment return perspective, but it may provide a better user experience for those keen to have greater control on how their portfolio is constructed yet do not want the hassle of researching and picking stocks or other assets. The business model is scalable and profitable. Interest in the product is also high with more than 2000 customers in the waitlist for its beta launch. However, there hasn’t been much evidence of user testing yet with the product and the lack of customer feedback when developing the MVP might pose a risk of building a product that customers might not really want.

The business defensibility is questionable as customer’s switching cost is low and the cost to build a similar / more superior product is relatively low. There is also no obvious network effect as it scales. The one thing that might increase the stickiness of the product is the potential “hook” effect of the product. The gamification of investing in the app might intrigue users and keep them coming back to the platform.

The founding team seems credible and consists of a variety of skillsets. However, one obvious experience/skillset that is missing is the experience of working in quant trading and building algorithm trading systems in large institutional funds. The founder had a successful exit 10 years ago in London, but the rest of the founding team has not work in a startup prior to this.

According to a quant trader from a reputable bank in Australia, the algorithms that Unhedged has published in their offer document seems legit and the performance benchmark is realistic. However, compared to established algorithms in the institutional space, the algorithms currently provided by Unhedged in its beta launch significantly underperform i.e. the algorithms that some of the hedge funds are using can have a Sharpe Ratio 3-4 times better. Unhedged has emphasized their plan to develop more and better algorithms after the raise, so this might be something to keep an eye on.

1 Based on the ASX Australian Investor Study 2020

Interview with Experts

See below an interview with a Quant Trader from Westpac Institutional Bank.

  1. Do you think algorithmic trading works? And what are the key factors in ensuring that the process works?

    Yes, algorithm trading works. But you need a team of PhDs/masters degree in stem discipline to make it have some chance of succeeding. I’d look for prior work experience at successful hedge funds/prop trading firms as indicators of success.

  2. Is algorithmic trading a truly automated investing? i.e. for an average person who is looking for a good return and not actively managing it, would it generate their expected return or more effort has to be put in to monitor the portfolio?

    Algorithm trading needs manual input and effort. Always. In this case, the manual effort is being provided by the fund manager here I am assuming and not the investor. They earn the 20% performance fee to compensate themselves for the effort.

  3. What do you think about the algorithms developed by Unhedged based on their backtesting results?

    Algorithms seem legit. I wouldn’t pay 20% performance fee because I can effectively do this myself, but I’m an expert in this field. An overall Sharpe of 1-1.5 is realistic, but it’s not that attractive. My own trading generates around 4 Sharpe for example.

  4. Would you invest in this company?

    I wouldn’t invest. It’s basically just a repackaged hedge fund that’s accessible for the retail market. The promised returns are okay but not amazing.

  5. Do you think you would create a product like the one Unhedged is offering and offer your expertise in algorithm trading to smaller retail investors in return for a fee? Or would it be too cumbersome and using institutional money would provide a better return for yourself?

    If you have a good algorithm, you would be running it yourself or at a hedge fund/prop shop, where you get a performance fee. It’s much easier to run strategies at an institution – easier access to tech, support and capital.

    The only reason you would offer strategies to retail investors instead is because 1) the strategies aren’t attractive enough to be run at a hedge fund, 2) you can more easily attract retail investors into investing into a sub par product with hype like AI and ML.

    I don’t think Unhedged offers much competitive advantage or unique edge. A retail investor can just invest in actual hedge funds which are well regulated (min investment is 10k usually). And investment managers don’t need retail funds if they’re actually good at what they are doing – they would have been backed by institutional money instead.

Thanks for reading. Feel free to let us know what you think about the company and crowdfunding campaign in the comment box below! 🙂

Zoom… Zoom. Happy Hunting!

The Startup Investigator

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