Boring Trading Strategies: Nice during crazy times

An update on Collective2’s “C2Star Program” 

In February 2018, Collective2 had a near-death experience. At that time, some of the most popular trading strategies on Collective2 traded “volatility.” To be exact, these strategies bet that volatility would go down, or remain low.1

But in February of that year, volatility exploded upward. Here is a chart showing how “volatility” behaved at the beginning of 2018:

Volatility in 2018

Before 2018, “volatility” (which measures how quickly the stock market moves) stayed low for a very, very long time. And then, suddenly, it didn’t.

Many of the popular strategies on Collective2 blew up, and a lot of investors lost money.

Here is a chart showing Collective2’s “assets under management” for the time period in question:

Collective2 Assets Under Management (AUM) were growing nicely… until Volmageddon struck.

“Volmageddon” (as the financial industry came to call the February 2018 explosion in volatility) was a wake-up call for Collective2.

Until that time, Collective2 considered itself an open platform. We allowed anyone in the world to post a trading strategy on our site. We monitored these strategies, and reported their results in real time; and we allowed investors to replicate these trading strategies inside their own brokerage accounts. We called Collective2 “the world’s first distributed hedge fund” — and, if you can get over that whiff of Silicon Valley self-promotion, there was a lot of reality beneath the claim. Basically, we said to people: “Rather than tying up your capital with one New York hedge fund manager who runs a secretive black box, and who won’t always give your money back when you ask for it, and whose performance will decline as he gathers more assets, why not create your own personal hedge fund by replicating the strategies of several ‘emerging’ hedge fund managers — that is, people who do not necessarily live in New York; who do not work at Goldman; who did not go to Harvard. Oh, and by the way, your money never leaves your own brokerage account. You just use Collective2’s magic software to replicate the trades of various trading strategies inside your brokerage account. You can pull the plug any time. No need to ‘ask for your money back.’”

Compelling sales pitch… until…

It was a pretty compelling sales pitch, and it helped C2 aggregate nearly $100 million dollars of assets under management by the beginning of 2018. Now, remember, no one handed their money to Collective2, and there was never $100 million sitting in our brokerage or bank account. Rather, hundreds of customers “attached” their individual brokerage accounts to our software, and chose to follow some of the trading strategies that were available on our platform. In aggregate, these customers risked about $100 million dollars.

And, boy did they risk it. As the chart above demonstrates, Volmageddon caused about $30 million dollars to “leave” Collective2 in a hurry.

“Leave” is an anodyne word that fails to convey real human stories, and real human pain. Some of that $30 million represents customers who lost money due to the strategies they chose to follow; some of that was customers who didn’t necessarily lose money but who saw things they didn’t like, and so pulled the plug on their Collective2 experiment.

So the policy of: spend a lot of money to acquire customers, and then just let them make crazy-ass decisions and blow up their own trading accounts, and then tell them, ‘Sorry, you chose to make a crazy-ass decision’ … well, as a business strategy, it isn’t optimal.

The hard thing about Volmageddon, and other incidents that cost customers money, is that they are not, strictly speaking, Collective2’s “fault.” After all, we don’t choose which strategies our customers trade. Customers make their own decisions! Remember how we call ourselves an “open platform?” Well, before Volmageddon, we really drank our own Kool Aid. There are thousands of strategies tracked on the Collective2 platform, and we assume customers can use their own talent and smarts to evaluate the track records of these strategies and make wise decisions. (For the statistically-oriented investor, the level of detail available on Collective2 is astounding. Prospective investors can even drill down into individual trades within a strategy track record, and can see the real prices received in individual real-life brokerage accounts that follow a strategy — anonymized to protect privacy, of course.)

So in theory customers knew exactly the risks they were taking when they signed up to trade a strategy that, for example, bet volatility would remain low.

When customers lost money due to Volmageddon, or other market downturns, our temptation at Collective2 was to throw up our hands and say, “Well, tough luck, kid. Sorry you chose such risky, stinky strategies.”

And for the longest time, that’s more or less what we did. Well, without the “tough luck, kid” part… and with suitably lawyer-vetted boilerplate attached to our emails. But the message was the same: You chose the strategies; we’re just an open platform; and you can choose any kind of strategy you want — good or bad. Sure looks like you chose… bad.

Except, the problem was: that felt yucky. And also: it made for a really crappy business model.

Because as anyone in the financial industry will tell you, the expensive part of running a fintech business ain’t the electricity for the computers, or even the salaries for the computer programmers. The expensive part is finding the goddamn customers. Every single customer that signs up at Collective2 costs us a tremendous amount of money to acquire. (While we can’t tell you exactly what the number is, we’ll guide you like this: choose a customer acquisition cost (CAC) number that sounds sufficiently, ridiculously high. Then multiply it by 10x. That’s how much it costs.)

So the policy of: spend a lot of money to acquire customers, and then just let them make crazy-ass decisions and blow up their own trading accounts, and then tell them, “Sorry, you chose to make a crazy-ass decision” … well, as a business strategy, it isn’t optimal.

On the other hand, the magic of Collective2 — the thing that makes it really compelling to a lot of investors — is that you can choose your own customized solution. And some people like high-risk strategies from completely unknown strategy managers. After all, sometimes “high risk” can mean “high reward.” (Not always, obviously!)

So while it didn’t feel right to encourage Wild West gun-slinging trading, it also didn’t feel right to completely “lock down” Collective2 and restrict people’s choices entirely. A lot of people want to be able to choose any strategy they please, thank you very much. And who are we to say they are wrong?

A C2Star is Born

That’s when I had an idea. What if we told strategy managers, “You can run any strategy that you like on Collective2. However, if you agree to trade within certain tight risk-control parameters, we’ll guarantee you a minimum income. And also, we’ll lower our fees to you, and also we’ll give your strategy extra promotion on the Collective2 platform.”

Thus was born “C2Star Certification.” To participate, a strategy manager pays a small entry fee (so that they have some skin in the game), and they agree to run their trading strategy on Collective2 according to very strict parameters. If they comply with these restrictions, we guarantee that they’ll earn $1,000 per month minimum on C2. (Okay, before you pummel me with snarky comments, let me stress: that’s the minimum. Good strategies can earn a lot more than that as they attract investors who replicate the strategy inside brokerage accounts.) The idea of guaranteeing a decent minimum earnings threshold to strategy developers was something completely new for Collective2.

And frankly, we had no idea what would happen. Would we go bankrupt as 10,000 great strategies piled onto our platform? Or would no one show up? Or would our risk-control restrictions be so strict that no one could qualify for C2Star Certification?

Critics gonna hate hate hate

Collective2 has an active user forum, where our members have passionate opinions and don’t mind sharing them. Often those opinions boil down to: “Matthew, you are stupid.” Or, “Matthew, you are trying to deceive us like some kind of James-Bond super villain hiding inside a volcano.”

When we launched C2Star, many passionate Collective2 users had typically passionate opinions. Like these, posted on our public forums:

My opinion is that no one will be able to satisfy all of the criteria for a sustained period of time and C2 will be making a lot of money on everyone continually resetting their strategies for more and more fees.”

The idea is good. But conditions are not realistic to comply with. …It’s not realistic to comply with the risk conditions.”

That kind of ‘throw out, re-churn, reset and pay us $200 for the privilege’ reeks of c2 trying again to profit from wannabe’s.”

Practically, the parameters they are setting are nigh-impossible to maintain – the law of averages will kill it, and hey-presto the tills go ka-ching for another $199 for C2.”

Needs a lot of thought, I just hope Matthew et al are not launching this too prematurely, or overly-motivated by the additional fee income.”

Nearly no one in C2 is going to subscribe to a 10%-20% annual return strategy, the whole idea of joining the c2star program is to get that $500 monthly income from C2 per month per strategy.”

I am not sure what kind of client C2 is attracting here, it is confusing, and the cynic in me keeps coming back to this same conclusion (sorry Matthew) that this needs a lot more work before it can be of true benefit to both trade leaders and subscribers.”

Very difficult to succeed. The rolling maximum 24-hour drawdown of $2000 is a killer. I will be surprised if any futures trading system gets certified.”

You get the idea! The response from the vocal members C2 community fell into three buckets:

    1. The criteria to be certified as a C2Star strategy are just too hard; no strategy will achieve it (for long). The program will fail.
    2. The criteria to become certified require that traders try to decrease risk. This means there will be lower returns, and no one comes to Collective2 for lower returns. The program will fail.
    3. The program is just a cynical scheme in which Collective2 takes advantage of trading-strategy developers and collects program entry fees, without offering any realistic hope that they will earn money in the long term. The program will fail.

Now, in fairness, most of the people that posted these messages were themselves strategy managers on Collective2 — not investors — and there are all sorts of reasons a strategy manager might not like the C2Star program. Some managers traded successfully in a style that would not meet the program’s requirements. Others didn’t trade successfully at all. In either case, C2Star certification program could be viewed as a risk to these managers.

What happened next

Here’s the way this story is supposed to end. Despite all the naysayers, the C2Star program proved to be an obvious success. Thousands of trading-strategy managers applied for C2Star, hundreds achieved certification, and hundreds of investors — that is, people that chose strategies to replicate inside their personal brokerage accounts — chose only C2Star strategies, thereby concentrating investor capital in strategies less likely to blow up, thereby decreasing the risk of the next Volmageddon. (Let me repeat my general caveat again: “less likely to blow up” does not mean guaranteed to not blow up!)

That didn’t happen. For many months, the C2Star program was merely a modest, incremental success. We attracted a growing number of strategy managers who agreed to manage their trading strategy according to our strict risk controls. We attracted a growing number of investors who wanted to trade these strategies.

But the numbers, while growing each month, were nonetheless quite modest. Not thousands of strategies, certainly. Economically, the program was a manageable money-loser for Collective2. We paid out thousands of dollars more every month than we collected (so much for the program being a cynical ploy to reap entrance fees). 

But I kept the program going, and considered it a good investment, because it assured us that Collective2 would always have a stable of well-managed conservative strategies available on our platform — even if investors did not flock to them.

And there was the rub. Making strategies available on the platform is not quite the same thing as forcing investors to use them. In fact, the reality was that most investors chose not to use C2Star strategies… even though we promoted the hell out of them.

On January 16 of this year, I tweeted a lament that the most popular strategies on Collective2 (popular in the sense of most dollars of capital following them) were actually very lowly “ranked” according to our scoring methodology:


But it was worse than that. It wasn’t merely that investors flocked to lower-ranked strategies. The C2Star program never even cracked the Top Twenty! That is: out of the top-twenty most-followed strategies ranked according to AUM, not a single one was C2Star Certified… even though there were half dozen fully-certified strategies, and a dozen more in the process of being certified.

Notice the date of the tweet: January 16, 2020. This was approximately the time that reports had begun filtering out of China about a strange new virus spreading in the province of Wuhan.

When markets darkened, C2Star shined

Okay, another caveat. What I’m about to write will sound self-congratulatory and overly optimistic. I want to stress that nothing I write here is meant to convey that investing through Collective2s is low-risk, or that it is appropriate for everyone. Trading is generally risky. Trading at Collective2 is even more risky. You can lose money. Okay?

Now, on to my main point. Everyone knows what happened next. The stock market completely, utterly collapsed, at a speed and magnitude greater even than that of the stock market crash of 1929, which ushered in the Great Depression.

To refresh your memory, here is how the stock market treated buy-and-hold investors when the COVID-19 pandemic began to spread:

Ugly stock market

The stock market plummeted when COVID-19 struck. The market had never fallen so far, so fast.


And how did those popular, high-risk Collective2 strategies do during the same period? Well, about the same as the stock market did, but that ain’t saying much.

On the other hand, how did those boring C2Star strategies perform? Well, it turns out that there are times when boring strategies are nice to have around!

I have built a little “testing workbench” that allows me to see how Collective2 strategies hypothetically perform during arbitrary periods of time. I told my workbench: “Show me what would have happened if I had invested ONLY in the C2Star strategies that were ‘certified’ as of the beginning of the year (i.e. right before COVID). Assume I held on to that portfolio, no matter what happened, even after COVID decimated people and markets, until March 23 (when I ran the test).”

Here is what my workbench shows:

Matthew's secret strategy-scoring workbench.

Behind the scenes at Collective2: Matthew’s secret strategy-evaluation workbench shows that a portfolio consisting only of fully-certified C2Star strategies would have done okay in the COVID meltdown. Remember, these are hypothetical results and maybe purely lucky. Assume you can lose money. Only trade with risk capital.

Let me remind you again, at the risk of being tedious: the results above are completely hypothetical. They suffer from hindsight bias. No one actually traded that exact portfolio in real life. All the standard disclosures and caveats apply. In other words, don’t get too excited.

But still!

I can’t help but feeling that the C2Star program was vindicated to a small degree by the COVID market meltdown. C2Star did exactly what it was meant to do: it provided the Collective2 platform with a critical mass of strategies that did not blow up when the markets did.

I’m therefore happy to report to you (as I will report to my own investors in my monthly investor letter) that, while Collective2 has been affected by the market downturn (our AUM is down), things are not as dire as they could have been. The fact that C2Star strategies were available (even though they were not the most popular strategies on the platform, they were still used by many investors) mitigated the worst effects of the meltdown. And the fact that C2Star strategies are available, even after the meltdown, gives Collective2 users reason for cautious optimism.


Learn more about C2Star

Here are some resources for people interested in learning more about Collective2 and C2Star certification.

Here is a list of strategies currently participating in the C2Star program:

Here are the requirements for participating in the program:

If you’re a strategy manager interested in signing up for the program, start here:


1. Volatility is a measure of how much, and how quickly, the market moves. But it can also literally be traded through futures contracts or ETFs. In other words, sophisticated traders can place bets on whether the market will move a lot or a little. In February 2018, many strategies on Collective2 were betting that volatility would stay low.

Important disclosures and warnings

Past results are not necessarily indicative of future results.

These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

You may be interested to learn more technical details about how Collective2 calculates the hypothetical results you see on this web site.

Material assumptions and methods used when calculating the result
The following are material assumptions used when calculating any hypothetical monthly results that appear on our web site.

Trading is risky
There is a substantial risk of loss in futures and forex trading. Online trading of stocks and options is extremely risky. Assume you will lose money. Don’t trade with money you cannot afford to lose.

Collective2’s statement about CME Rule 575.D

On December 23, 2019, Collective2 agreed to pay a $30,000 fine to the Chicago Mercantile Exchange (CME). Our offense was: in December 2018, too many customers traded using Collective2, and therefore the price of what they traded changed too much.

The facts of the case

Collective2 is a web site where customers verify track records of various trading strategies. If they find a strategy they like, customers can use Collective2’s software to have the strategy’s trades placed inside the customer’s personal brokerage account. (Even though trades are automated, customers control many aspects of trading. For example, they can customize how large or small to make trades, can set their own stop losses and profit targets, and can make positions bigger or smaller at will.)

On January 23, 2018, a popular strategy on Collective2 traded a futures contract on an exchange owned by CME (the “Dow E-mini” contract). When the strategy recommended that Collective2 customers sell the contract, so many customers placed trades inside their own brokerage accounts using our software that the price of the contract changed as a result.

Or, as the CME describes it: “Collective2 … trading on behalf of multiple accounts, caused significant price movements in the March 2018 E-Mini Dow futures market.”

If you read that sentence and say: “Wait a second. When lots of people want to sell something, isn’t the price supposed to change? Isn’t that what an exchange is supposed to do?” then you’re not the only one. 

We were equally surprised by the CME’s complaint.

Notice what the CME is not saying:

  • They are not saying Collective2 placed erroneous trades. 
  • They are not saying Collective2’s software malfunctioned.
  • They are not saying Collective2 (or any company employee) somehow profited from the trades.
  • They are not saying that Collective2 manipulated the market to receive an unfair price.
  • They are not saying that Collective2 “spoofed” the market (i.e. submitted orders to “fake out” other traders).

What are they saying? 

Rule 575.D, which the CME accused us of violating, states:

No person shall enter or cause to be entered an actionable or non-actionable message with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.

In the CME’s view,  our software placed trades for our customers with “reckless disregard for the adverse impact on … orderly conduct of trading.”

The CME’s position is that it is “reckless disregard” to place trades that customers want to place, as soon as customers want to place those trades, without considering that prices might change as a result, and without trying to prevent those price changes.

We respectfully disagree with this interpretation of Rule 575.D

We don’t disagree with the facts presented by the CME. Collective2’s software was designed to place trades as soon as customers wanted to place trades. We did not consider it our obligation to prevent prices from changing as a result of customer trading. Indeed, until the CME fined us, we had considered it our duty to customers to place trades quickly, with as little delay as possible. 

Collective2’s position on this matter

Collective2 respects the CME and the people that work at the firm who enforce exchange rules. However we disagree with this particular interpretation of Rule 575.D, and believe it may ultimately hurt retail traders who rely on software platforms such as Collective2 to place orders.

We do not have the resources to fight a protracted litigation, however, and therefore we agreed to settle this matter. We will respectfully comply with the CME request to change our software so that it monitors market prices and tries to prevent prices from changing too much when customers place trades.

Hedge funds stole money from my father — that’s why I started Collective2

After working for 50 years, and achieving business success most people dream of, my father had a problem. What to do with his money?

Some people dismiss this as a “first-world problem” — not worthy of righteous intellectuals’ concern. But it was still a problem — his problem — and my father wasn’t alone. When interest rates are zero, and inflation is not, putting your money in the bank — whether a thousand dollars, or a million — is the exact mathematical equivalent of asking someone to remove half your cash over the next fifteen years. Think about that: work for fifty years, stick your money in a bank; and then, fifteen years later, half of it is gone.

What about the stock market? Investing in the “stock market” sounds like a good idea, until you actually study the history of the stock market. When you do, you will see that stock-market “corrections” cause a third of your money to instantly vanish, and that subsequent bear markets can — and have! — lasted for several decades at a time. A person who “bought the dip” in 1969 would have waited for 25 years to get his money back. Conceivable maybe for a twenty-year-old, not-so-smart for a man pushing 70.

You could invest in real-estate, but this was the industry in which my father had built his nest egg, and his goal was to take money off the table, and perhaps to wind down a bit and enjoy life. Real-estate investing requires diligence, and work, and brings with it endless heartache.

So what was left? What does a man with cash actually do with it, when he wants to take a break, and step back, and not work so goddamn hard?

My father found an answer. Hedge funds. Let someone else steward his capital, and make it grow. After all, hedge fund managers are financial experts. Why not leave a tough job to experts?

The Game Plan

The title of this article tips my hand, so you already know that my father’s plan didn’t work out as expected. But it wasn’t for lack of caution.

For here is something you don’t know about my father, but you’ll have to accept my word for it: my father is the most thoughtful, cautious man I know. You remember that fact I threw at you several paragraphs ago — about how stock-market corrections can make 33% of your money disappear overnight? That came from my father. He taught me that growing up. Indeed he mentioned it often, because he had lived through it, more than once, and he worried it would happen again.

His caution extended beyond investing. Growing up, whenever I came up with an idea — whether sensible, or preposterous — my father always urged me to slow down, think through the possibilities. Sure, this assumption might work out, and that goal might happen… but what if it didn’t? What if the thing you’re counting on doesn’t materialize? It’s fine, go ahead with your plan, but have contingencies. Recognize there is a spectrum of possible outcomes, and plan accordingly. My father is a living, breathing Value-at-Risk calculation. He taught me that life, and the events that unfold within it, do not always fall within one standard deviation.

So when he decided to invest his money in hedge funds, my father did so in his typical cautious, plodding — sometimes maddeningly so — way.

No rush. Think. Do research. Assume the worst, and try to minimize risk.

He placed phone calls. He spoke to people — friends, business associates, advisors, experts. He sought their opinions. He asked for references. He bought access to hedge-fund databases, which contain deep and accurate information about thousands of hedge funds strategies and performance.

He checked the manager’s records for disciplinary violations, criminal convictions, bankruptcies, judgments.

He decided to diversify. Sure, hedge funds sound great, but you can’t have complete confidence in any single one. You don’t want to risk everything on one fund, or one manager. And my father is a cautious man.

Ultimately, he invested in over a dozen hedge funds. They were a mix of different kinds of strategies, and different kinds of managers. He invested in a credit fund, a long-short equities fund, a fund that traded commodities, a fund that traded volatility, even a fund that traded live cattle. The managers running these funds were similarly diverse: a Harvard-educated amateur hockey player! A former chairman of NASDAQ! A credit expert from New Jersey! A recent Chinese immigrant with a math PhD!

The scorecard

How did it work out? Here’s the scorecard.

Hedge-fund scams: Case-by-case study

Losing money is one thing; it’s to be expected when you invest in risky funds. But outright theft?

Let’s examine how my father’s money was stolen. We’ll look at each theft in turn.

The Ponzi scheme

Out of the all methods that hedge funds use to rip you off, Ponzi schemes are the least interesting. And, out of all types of fraud, Ponzis should be the easiest to spot. In a Ponzi scheme, no investing actually takes place. There is no trading. A Ponzi operator simply take the money from new investors, and give it to old investors. To spot this kind of fraud, an investigator need only walk into the hedge fund office, and ask to see the trading records. Game over.

So how was my father fooled by this? Today, years later, he’s the first to admit his mistake was silly, and that he should have been more suspicious. But in fact he was suspicious. The monthly returns for this particular fund were so good — almost too good — that they raised concern. And yet… and yet. This was not some fly-by-night startup hedge-fund that had just recently popped into existence. It had been operating for over a decade. It was run by a famous man. Its investors included other wealthy and famous people. The authorities knew of this fund. They knew about its excellent returns. This fact, more than any other, gave my father comfort: if there was something illicit going on, then surely the SEC would have discovered it, during the many years the fund had been operating. They didn’t.

Marked-to-Market Shenanigans

Now let’s turn to another hedge fund that my father invested in, and another way hedge funds can steal your money.

The term “marking to market” means deciding how much something is worth. When you buy a stock — let’s say, one share of Microsoft — you know how much that share is worth. You paid $20 dollars for it. So at the moment you buy it, it’s worth exactly that: $20 dollars.

Imagine six months pass. Now how much is your share of Microsoft worth? Determining this is equally simple: just look at the stock-market price of Microsoft. If it’s $30 dollars, you just made a profit of ten dollars. You don’t have to actually sell your share to calculate the profit. And if you’re a hedge fund manager, you can feel completely justified in charging your clients a portion of this ten-dollar profit. This is your business model, after all: make profits for your investors; keep a portion for yourself.

But the thing is, a lot of hedge funds don’t invest in plain vanilla stocks. Indeed, the appeal of some hedge funds is that they invest in exotic assets which are complex, hard to find, and not simple to trade. After all, anyone can buy a share of stock using his Ameritrade account. Why should you pay high fees to a hedge fund to do that?

Therefore many hedge funds seek, and invest in, complex assets that regular people have a hard time buying and selling.

Like, for instance, a PIPE. A “PIPE” is the acronym for a “private investment in a public equity.” Without bogging down in detail, let’s describe a PIPE as a financial instrument that is a combination of debt and equity.

The actual mechanics of PIPEs aren’t important. What is important is that there isn’t a stock-exchange for PIPEs. If you’re a hedge fund, and you want to invest in PIPEs, you call up small companies in distress, and you negotiate with their CEOs, one-on-one, and at the end of that negotiation, you walk away with a piece of paper that cost you, say ten million dollars. You hope that piece of paper will go up in value.

Now, a year passes, and you need to decide how much that piece of paper is worth. This is an important question, because the answer tells you how much you can charge your hedge-fund clients at the end of the year. Remember that hedge funds charge, typically, 20% of profits.

So, to take a simple example, if your PIPE investment makes a profit of $10 million dollars, you can charge investors $2 million dollars in fees. Which is very nice, because it helps pay for your house in the Hamptons, and your kids’ private schools, and maybe a jet card.

But it does raise a troubling question. How exactly should a hedge fund decide how much a PIPE is worth? Sure, you paid one million dollars for it, but a lot of time has passed. Maybe the company you invested in is doing well. Maybe it’s not. Who can be sure?

There’s no “PIPE Stock Market” where you can look up the current price of a PIPE. In fact, the PIPE you now hold is a one-of-a-kind financial creation. Who knows how much it’s worth?

I think you can spot the problem. How do hedge funds “mark-to-market” their investment in PIPEs, or fine art, or collectibles, or private companies, or whatever? How do they determine what things are worth?

I’ll tell you how. They pick a number out of their ass, and declare, “The PIPE is now worth X!”

And they say this with great conviction. And lo and behold — guess what? — somehow, miraculously, that number is never lower than the price at which the PIPE was purchased. Never.

And the hedge fund manager writes a warm and heartfelt letter to his investors, explaining that the fund enjoyed a terrific year, and that its investment in PIPEs yielded a +20% return. Oh, and that, the hedge fund manager will claim his fair share of that profit as his fee.

To be fair, sometimes a hedge fund hires a “valuation expert” who is paid by the fund to offer an arms-length, third-party opinion about how much a PIPE is worth. These valuation experts use complicated math, and formulas, to make valuation decisions.

You remember the thing I told you about how hedge-fund managers have a house in the Hamptons that needs to be paid for? Well, valuation experts also have houses that need to be paid for. Maybe not in the Hamptons. Maybe in Sayville. But still.

Guess what happens if the valuation expert doesn’t come up with the “correct” valuation after being hired by a hedge fund? He is fired by the hedge fund. Another valuation expert is hired in his place. The new valuation expert understands the lesson. Somehow, miraculously, his complex math comes out “just right.” The PIPE is worth more today than it was yesterday!

At a certain point, this kind of marking-to-market fakery comes to an end. In the case of PIPEs, perhaps the company you invested in goes bankrupt. Or maybe the private firm in which you bought stock is itself acquired for a much lower price in a legitimate market transaction which cannot be ignored.

But this can take many, many years. And in the meantime, the hedge fund manager has pocketed millions of dollars of fees. Perfectly legally.

Side Pockets and Lock Ups

Hedge funds specialize in investing in risky, illiquid, hard-to-value stuff. But sometimes, fund managers decide to invest in something so freaking “out there” that even they feel the need to differentiate it from their run-of-the-mill investments.

Take Philip Falcone. Please. After making a fortune calling the 2008 housing-market crisis, Falcone’s hedge fund, Harbinger Capital, enjoyed a sterling reputation. Falcone was a Harvard grad, a college hockey star who turned pro for a while, and a prescient investor with balls of steel. My father had heard about his hedge fund, and he wanted in. Be careful what you wish for.

Almost as soon as my father invested, things went south. Falcone declared that he would invest $2 billion dollars of investor money in a telecommunications startup with a risky business plan. The plan was: to take spectrum already allocated by the government for satellite communications, and without permission, to re-purpose that spectrum for use by cell phones. For the plan to work, everything had to go just right: the regulators needed to approve, and the science needed to work. Neither happened.

It turns out that the cell-phone technology interfered with GPS systems — causing Garmins to direct drivers off the road, and military drones to veer off target. The government, unsurprisingly, rejected Falcone’s plan.

But the point is, those of Falcone’s investors who didn’t want to go along with such a half-assed, risky scheme, had no choice.

Falcone set up what the hedge-fund industry calls a “side pocket.” These are special side deals where investor money gets funneled. When investors’ money is locked up in a side pocket, investors cannot ask for it back. (Technically, they can ask. But the side pocket is constructed specifically to prevent investors from getting money back. Side-pocket money can be locked up for decades.)

The theory behind side pockets is: some deals are very complicated, and they take a long time to come to fruition, and in the meantime, they are completely illiquid. (When an investment is “illiquid” that means it’s hard to sell. If you try to sell an “illiquid” investment in a hurry, you’re going to take a big haircut on its value, and lose money which you wouldn’t necessarily have lost if you were more patient.)

Side pockets are perfectly legal, but they have a well-deserved reputation for being unfriendly to investors. I mean, look, maybe I do want to invest alongside Phil Falcone — he went to Harvard! He was a hockey star! — but, maybe I’m not super-enthusiastic about trying to violate the spirit of FCC spectrum allocation rules, okay? And maybe I don’t want to invest in a Vietnamese casino, when gambling is not yet, you know, legal in Vietnam. (Yeah, that also was in a Falcone side pocket.)

The point here isn’t to make fun of Phil Falcone, whose investment in LightSquared, the telecom firm, went to a value of zero dollars, and who… well, wait, actually, that is the point.

Because in addition to losing my dad’s money in that cockamamie scheme, Falcone was also accused by the SEC of “borrowing” $113 million dollars of investor money to pay his own personal taxes. And also, of trying to manipulating bond prices. Falcone admitted wrongdoing and settled with the SEC.

The little guy in the story, my dad, lost over a hundred thousand dollars in that fund. He lost that money because, even after my father lost faith in Falcone’s investment strategy, and even after my father asked for his money back, Falcone refused to return it.

The “refusing to return investor money” part of the story? That part is perfectly legal, by the way. It’s just the way hedge funds operate. Like it or lump it. You want to play with the big boys? You have to accept the big-boy rules.

Let’s destroy hedge funds and replace them with something better: Collective2

I started Collective2 in order to destroy the hedge fund industry. Collective2 is a fully transparent, open, investing-and-speculating platform. We use the internet, and software, to make risky investing more transparent, less subject to fraud, and — frankly — a lot more fun.

Every problem I describe above — Ponzi schemes, valuation games, side-pockets, lock-ups — is eliminated by Collective2.

Here’s how.

The first thing you need to know about Collective2, and maybe the only thing, is this:

At Collective2, your money stays in your account.

At Collective2, you never give your money to anyone to “manage.” You never write a check. You never wire money, or deposit it elsewhere. Your money stays in your brokerage account. Period. End of story.

Through the magic of Collective2 software, trading strategies are “executed” within your brokerage account. You choose which strategies get deployed, and at what quantities. You select these strategies by examining hypothetical performance statistics on the Collective2 web site.

Of course this is still risky, and of course you can lose money. But the point is, when you don’t actually hand your money to a stranger, you don’t need to worry about that stranger stealing it. Losing money is one thing. Having it stolen by a crook is something very different. Collective2 eliminates that problem.

No more Ponzi schemes

The mark of a Ponzi scheme is that the trading strategy which the manager claims to be using isn’t actually being used. Typically, in a Ponzi scheme, no trading is actually done. It’s all imaginary.

Here’s the thing about Collective2. That simply can’t happen. Your money stays in your brokerage account. You can see every trade as it happens.

Every trade.

As it happens.

In real time.

When I speak to industry veterans from the world of hedge funds, and I explain this part of Collective2, they are astounded. “You mean, when I execute a trade, every client sees the trade as it happens? And they can see my strategy’s profit and losses as they happen?”

Are these hedge-fund veterans made uncomfortable by this notion — that customers can see what they’re up to? Perhaps.

Because not only does Collective2 prevent Ponzi schemes (of course it will be obvious when a strategy doesn’t place any real trades, since you can see all trading activity within your account); Collective2 also lets customers understand when “style drift” occurs — that is, when strategy managers promise to trade in one fashion, but actually trade in another.

And because you know how strategies are performing minute-by-minute, you don’t have to wait for your end-of-quarter investor report to receive bad news. You can see instantly that a strategy isn’t working, and can pull the plug that minute.

No wonder hedge-fund veterans grow uncomfortable when they hear about Collective2.

No more lock-ups. No more side pockets.

Let’s talk about how this process of “pulling the plug” actually works in practice.

Let’s say you use Collective2, and you choose a strategy, and you decide, after some time, that you don’t really like the strategy you chose.

Guess who you need to talk to? No, you don’t need to place a phone call to a hedge-fund IR representative, asking for your money back. You don’t have to write a certified letter to anyone, begging for a redemption.

You just speak to… yourself. You say, “Dude, this strategy isn’t working so great. Let’s stop.” And that’s it. Maybe you shut off Collective2 completely, or maybe you choose another strategy you like better. It’s your choice. Because it’s your money. And you never have to ask anyone’s permission to stop trading.

No more “Harvard Grad” “Hockey Stars”

The weirdest thing about the hedge-fund industry is how obsessed it is with credentials.

Which isn’t so surprising, when you consider how easy it is for hedge funds to steal investors’ money. And how common it is for hedge funds to defraud investors (recall my father’s personal scorecard: four of the funds my father invested in were fined or shut down by the SEC). Given the prevalence of fraud, perhaps we should not be surprised that investors gravitate toward people with fine “pedigrees.”

But wait. The largest Ponzi scheme in history was operated by a former chairman of NASDAQ.

Phil Falcone, who used my dad’s money to pay Falcone’s personal taxes, and who refused to return the money when asked, went to Harvard.

Which raises the question: What good are credentials, when they don’t seem to mean anything?

In fact, you could make an argument that fine credentials not only are useless, but also are counter-productive. If every investor seeks out only Harvard-educated hedge fund managers, and there aren’t enough of them to go around, then won’t every investor in the world be slicing the same small pie? Won’t everyone be piling into the same conventional trades?

Wouldn’t it be better to seek out strategies operated by people with unusual backgrounds, or with deep experience in vertical industries, or with novel philosophies and ideas?

I mean, look, I wouldn’t write a check to some guy in a Moscow basement, who hasn’t studied in the United States… but, maybe, just maybe, I might use Collective2 to “allocate” a small piece of my capital to him. Because remember how Collective2 works: the gentleman in Moscow can’t access my money, and he can’t abscond with it. All he can do is apply a trading strategy to it. And I can watch every trade as it happens. And so, who knows. Maybe I’ll take a flier on him. Maybe he’ll lose. Maybe he’ll win. But at least I have the opportunity to see how he does.

This is perhaps the most exciting aspect of Collective2. Collective2 is an open platform. Anyone with a strategy can run it on Collective2.

“Anyone can run a strategy on Collective2? That’s crazy!”

But wait. If anyone can manage a strategy on Collective2, how do you know who is a good manager, and who is not?

Simple. You look at the Collective2 track record. Every trade is there. You can see which investors, if any, followed each trade. (Sometimes trades are not followed by any real-life investors, which of course should make a potential investor more cautious.)

For those strategies that are followed by real capital, you can see how much capital is following each strategy, each trade, each position! You can see which trades were executed at which brokers, at which prices, at which quantities. And of course you can see how well or poorly each strategy has performed overall.

Let’s put hedge funds out of business

The asset management industry manages over two trillion dollars. No, Collective2 won’t put hedge funds out of business overnight.

But the history of the internet is a story of small firms with big ideas, who somehow overthrow the traditional way of doing things. And if there’s one industry that deserves a bit of overthrowing, it’s hedge funds. Just ask my dad.

The hedge-fund industry is fundamentally broken. Let’s replace it with something better. Something like Collective2.

 — Matthew Klein is the founder of


Shares smacked after bad Q2

Shares of EBay, the original online retailer, hit one-year lows yesterday, when the twenty-three-year-old firm missed earnings estimates, and a slew of exciting “initiatives” failed to ignite revenue growth.

If your first reaction to this story was, “Oh, EBay? Are they still around?” …then you understand the extent of the problem that management faces.

$EBAY shares closed down over 10%.

Collective2 strategy Northquant Insight Fund trades EBay, and other tech companies. Its performance has been tracked by C2 for nearly five years.


Banks, dollar, and yields get hit

President Trump revealed his limited grasp of economics on Thursday when he criticized the Federal Reserve and expressed his opposition to a “strong dollar.” Since most Americans have dollars in their wallets, and not, you know, wampum or bitcoins, the president’s call to make the the wallets of every American less valuable seems, shall we say, counter-intuitive.

The greenback fell in response, backing off one-year highs. Treasuries slid at the prospect of slower or fewer rate hikes. Banks also fell, with $BAC, $MS and $JPM all down over 1%.

In principle, the Federal Reserve is independent of direct political interference. But the markets either do not know this, or, more likely, do not believe that frail human beings who inhabit cushy bureaucratic jobs, and essentially just want to chillax, can stand up to relentless, withering political attacks by politicians who specialize in ruthless knife-fights.


Notable Earnings on Friday, July 20, 2018

$GE – General Electric Co. – FQ2 ‘18 – BMO
$SLB – Schlumberger Limited – FQ2 ‘18 – BMO
$HON – Honeywell International Inc. – FQ2 ‘18 – BMO
$CLF – Cleveland-Cliffs Inc. – FQ2 ‘18 – BMO


EU fines Google $5 billion for… making perfectly reasonable business decisions

It is said that every nation gets the regulators it deserves.

If this is true, then Europeans must have done very stupid things in a previous life, because karma has brought them this: clueless regulators who are fining Google $5 billion dollars for… get ready for it… giving away Android for free to consumers.

So, okay, first things first. Let me explain how Google makes money. Google makes money selling ads on its search engine. When you search for information about “new cars” or “apartments in my area,” or whatever, Google shows you ads related to what you’re looking for. Each time you click an ad, Google makes a few dollars.

About twelve years ago, Google realized that they were in deep doo-doo, because everyone was moving away from desktop computers, where Google was dominant, and was starting to use smartphones, where Apple was dominant.

Which meant that when consumers wanted to “search” for something, they reached first for their Apple phone, not for their desktop computer.

That could potentially be bad for Google, and its ad revenue. The company that “owns the glass” (i.e. the company that controls the phone screen) controls how customers access information. If Apple “owned the glass” of every smart phone in people’s hands, Apple could strangle Google. In this worst-case scenario, users would shout at their phone, “Hey, Siri, show me apartments in my area!”

And Siri would respond, “I’m sorry, I didn’t quite get that.”

No, just kidding. In the nightmare scenario that Google dreads, Siri would actually understand what you are asking for, and would show you relevant apartment listings without involving Google in any way.

Which would be a problem for Google and its ad revenue.

The smart guys at Google saw this nightmare scenario coming, and they decided to defend themselves. If Apple or Microsoft “owned the glass” of every smart phone in the world, there would be no more search revenue for Google!

So what did Google do? They decided to compete with Apple by offering non-Apple smartphones. They would put Google-friendly “glass” in lots of consumers’ hands.

They did this in an interesting way. The hard part of building smartphones is creating the operating system — the software that runs the phone. Apple has spent hundreds of millions — maybe even billions — of dollars developing its iPhone’s operating system.

Google knew that most phone manufacturers would be unable to develop their own operating systems to compete with Apple’s. So Google bought a smartphone operating system (Android), and gave it away for free. Not to consumers, who don’t own manufacturing factories and can’t build their own smartphones. Rather, Google gave away the Android operating system to phone-manufacturing companies.

It was a win-win. Companies like Samsung and HTC could focus on building beautiful hardware, and wouldn’t have to re-invent the wheel by building half-assed operating systems for their phones. They could install a free, high-quality operating system (Android) on their phones.

Consumers benefited by getting a cheaper alternative to high-priced Apple phones.

And Google prevented Apple from “owning the glass” of all phone users everywhere. Instead, there would continue to be lots of high-quality but inexpensive Android phones in consumers hands, with access to Google search and services.

Sure, Google imposed some conditions on phone manufacturers. The conditions were exactly what you’d expect. Basically they boiled down to: “We’ll give you this amazing Android operating system for free, which will lower costs for you and your consumers, but please make sure Google still receives the search and services revenue generated by the phone.”

Which sounds like a pretty fair deal, does it not?

Consider the alternative: If Google did not give away Android for free, consumers would pay higher prices for Apple’s monopoly phones.

So it is bizarre, although not totally unexpected (given the EU’s anti-free-market reflexes), that EU regulators should decide to fine Google for, you know, defending their business. For providing free stuff to phone manufacturers. With some conditions imposed.

Google stock was basically unchanged today, despite the record EU fine.

Netflix plummets. No, skyrockets.


Investors dump $NFLX shares. Investors un-dump $NFLX shares.

On Monday night, investors fled $NFLX when the company missed its own promised subscriber-growth numbers. Shares plummeted in after-hours trading, and the stock opened Tuesday morning down 14%.

But that was Tuesday morning. By Tuesday afternoon, all was forgiven, and $NFLX had rallied +10%, closing at the day’s high.

Which means… what exactly? No one knows.

It might mean people overreacted, and Netflix is a great company, and a great stock, and so who cares about missing a subscriber-growth forecast. (By a lot.)

Or it might mean there are lots of people who follow a trading strategy popularly known as BTFD.

Or it might mean we are in serious bubble territory, with a single sector of the stock market fetishized by investors, and within that sector, just a handful of stocks garnering all investor attention.

Consider this: just four tech stocks — $AMZN, $AAPL, $MSFT, and $NFLX — account for over 80% of the S&P’s total 2018 performance.

So, which is it?

Is Netflix a bubble? A terrific stock? The media company of the future? A cash-burning furnace?

Try all of the above


$TXN CEO joins $INTC and $RMBS at losers table

Texas Instruments CEO Brian Crutcher was fired on Tuesday, due to what the company called “code of conduct violations.” Only a sick, twisted, angry writer would spend his valuable time sifting through Twitter looking for rumors about exactly which conduct policies were violated… so, suffice it to say, I couldn’t find anything. But nowadays “conduct violations” are short for: “stuff that use to be considered fine for CEOs to do, but which aren’t anymore, for now, until the current media hysteria blows over.”

Crutcher joins other former chip-company CEOs at the loser table: $INTC’s Krzanich resigned in June for dating an employee, and $RMBS’s Black for (according to the Rambus Board) “falling short of expectations.” (Geez, if that’s a crime, slide over and make some room for me.)

What is it about semiconductor CEOs and their willingness to flout regulations? How about this dime-store psychoanalysis: semiconductor manufacturing is a ruthless business, with rigid quality controls and low tolerance for any deviation from spec. Maybe by the time you reach position of top dog, you’ve had enough with petty “expectations” and “codes” of “conduct.” Maybe you just want to get a bit crazy.

Meanwhile, $TXN stock was down over 2% after hours.

How do you advertise your company when you’re not really allowed to advertise?

I’d like to tell you exactly what my company does. But I can’t. So don’t ask.

When Americans are children, they learn how business works. You advertise a product. People see your ad, decide the product interests them, and pay you. Win-win: your customer gets a product she actually wants; your business earns income, fair-and-square, enough to let it continue to offer the product to still more people who value it.

That’s how it’s supposed to work, anyway. But what if you’re not allowed to advertise? Or not allowed to talk about what your product actually does?

This is the case in certain industries which society has deemed offensive or troubling. These industries include: cigarettes, gambling, payday loans, and… financial services.

Collective2 is a financial-services company. We cater to people who want to try to beat the market. The reality is that most people can’t beat the market, not consistently. Indeed, most people who try to beat the market will lose money.

There, I said it. And if what I said is true — and I openly proclaim that it is! — perhaps the restrictions on advertising financial services make sense. After all, if most people lose money most of the time when they speculate, why encourage them to do it? There must be something unsavory going on, right?

Just buy an index fund!

If no one can really beat the market consistently, then there’s a case to be made that most people should just buy an index fund or ETF, and call it a day. That is, instead of trying to decide which specific stocks or futures will beat the market, buy the whole market instead. You won’t do better than the market as a whole, but you won’t do worse than it, either.

That’s the argument behind indexing, and the raison d’etre for companies like Vanguard, who pioneered the field.

But still, there’s a whole set of people in the world that want to try to beat “the market.” And there are people who think they are good at it. This is the reason why hedge funds, commodity trading advisors, and private equity firms exist: because someone, somewhere, wants to try to beat the market with some of his money.

And this is the reason Collective2 exists. No one at Collective2 thinks you should take all of your money and use it to try to beat the market. That would be insane. Rather, we believe that some people — people with money they can afford to lose — should take some of their money, a small sliver, and try to outperform the market. Read that carefully: a small sliver. Of money you can afford to lose. Because you probably will.

It’s not exactly a far-fetched idea. Nassim Taleb, the author of the The Black Swan, famously proposes that people ought to follow a “barbell strategy” when investing — that is, put most of their assets in ultra-safe investments, and a small portion into extremely risky, and sometimes exotic, investments.

That’s Collective2: we’re in the right-side of the barbell; we’re a service that sells exotic, unusual risk with low probabilities of good outcomes. We’re not meant as a place to invest your child’s college-tuition money, or your retirement savings. But we are a product that a rational person might choose to use in moderation.

But how to advertise it?

The problem is that companies like Collective2 are not allowed to advertise, not in the way most companies can.

What is Collective2’s product, described in simple terms? It is the possibility of market-beating returns. Not the likelihood of market-beating returns. The possibility of them. But financial firms are not allowed to describe market-beating returns.

Indeed, financial firms like Collective2 aren’t really allowed to advertise potential returns in any meaningful way whatsoever.

Okay, well, forget about numbers, then. Forget about returns and percentages.

What about real-life people using your product? What about advertising by using testimonials?

Testimonials are the go-to marketing strategy for internet and software companies. You’ve probably seen a hundred of these in the past month — a photograph of some bland-looking guy on a web site, with a caption that says: “John Doe over at Company X uses our product, and he loves it. It has increased his blah-blah productivity by blah-blah percent.”

Zendesk is not a financial-services company. They are allowed to use testimonials from actual customers.

Testimonials are great marketing because they crystallize in a customer’s mind how your product is used in real life, and what its real benefits are.

Human beings are natural storytellers. It’s one thing to present a dry data-sheet about a product, listing its features and performance, but most people’s eyes glaze over when reading something like this. Stories, on the other hand, about real people doing real things — now, that’s interesting. Stories are something humans enjoy and understand.

Except, it’s not allowed.

Not for financial-service companies, anyway. Every sector in the financial space has its own regulator, with its own arcane regulations, but generally speaking, “testimonials” from investors are verboten.

You notice a pattern here? The most effective types of marketing (saying what the product is, using testimonials to describe how a product is used) are forbidden. It’s almost as if someone, somewhere, wants to make it hard for small financial service companies to gain customers.

How Collective2 solved these problems

This is the part of the article where I’m supposed to explain how Collective2 overcame these hurdles, and figured out how to attract new customers despite restrictions on many forms of traditional advertising.

Alas, I can’t do that, because we haven’t. The truth is, we have no idea how to attract new customers without describing what our company really does, or without using testimonials, or without describing the (Small! Unlikely!) possibility of good returns.

So we muddle along, trying to follow both the letter and spirit of regulations*, while also introducing our company to new customers. On search engines, we market “against” larger competitors (the idea here is that customers already understand what these large, established companies do, so we can latch on to people’s interest in those firms to attract new customers to ours). We write blog posts (like this one) which we hope are interesting enough to motivate people to do the work of finding our web site (, and figuring out what the hell we do. We sponsor podcasts.

What about a video?

This week we’re trying a new marketing strategy. We’re releasing a marketing-ish video that kinda, sorta, but not really, describes Collective2. We use music and vague images that are meant to convey feelings and concepts (Collective2 is fun and exciting; our larger competitors are slow and boring). The video isn’t likely to win a Clio anytime soon (it was constructed out of stock footage), but, you know, it’s something new, and so we’ll give it a whirl.

Win free Collective2 service, Collective2 tee-shirt

If you’ve read this far, I have a favor to ask. If you find the video below Not Too Terrible, please share it on your Facebook, Twitter, or LinkedIn page (click the little arrow icon near the bottom-right the video). If you add a hashtag #roboro, we’ll be able to find your share. We’ll pick a winner at random and award a free month of Collective2 service, or a snazzy Collective2 tee-shirt. Just share the video with the #roboro hashtag to be included in the prize pool. It’s our scrappy attempt to get the word out about our pugnacious little startup, which isn’t allowed to market through traditional means.

If you like C2, please help. Here’s the video. Please share on your social media:


Matthew Klein, Founder of Collective2

Regulations are never created out of the blue, randomly, by mean people. They are created with good intentions, by good people… usually after a bad actor does something dumb or evil. I want to be clear that I am not criticizing regulators or regulations in general. Indeed, the people I have met over the years who regulate Collective2 have always operated with professionalism and courtesy, and they act out of what they consider the best interests of industry and society as a whole. So if it sounds like I am whining about the unfairness of it all… well, I am, sort of; but I also understand that regulation is essential to maintaining public trust in markets, and to preventing a race to the bottom among industry participants.

Where are the big, fat, lazy industries we’re trying to disrupt?

When’s the last time we all enjoyed a good “Lazy Stupid Company Destroyed By Tiny Upstart” story? It’s been way too long.

Sure, there was Netflix destroying Blockbuster. Everyone in the tech world liked that one. “Dumb” Blockbuster, which ran thousands of videotape-rental stores, was famously blindsided by nimble Netflix. The story is made even more delicious by the recent revelation that Blockbuster passed on the chance to buy Netflix for a mere $50 million. (Today, Netflix is worth $143 billion dollars.)

And what about Amazon’s beating Barnes and Noble? That was a classic! (If you’re too young to remember what Barnes and Noble was: it was a retail store that sold physical books. I shit thee not.)

Entrepreneurs love David and Goliath stories, and tech entrepreneurs most of all. These stories give us hope. Here we sit, in our shabby cubicles, eating Ramen noodles in threadbare hoodies, dreaming of the moment that our tiny, overlooked startup will be catapulted into the big time! All those executives at Stodgy Company X will rue the day they passed on acquiring our Turn-A-Photo-Into-An-Emojii app. They could have bought us for a cool fifty mil, but they neglected to reply to our email, damn them. (Well, okay, the email bounced, because the CEO’s address wasn’t on the web site, and so we just guessed; but, still, you get the point.)

The thing is, these Huge Fat Lazy Industry Destroyed By Startup stories are weirdly rare. Blockbuster was delisted from the NYSE in 2010. Barnes and Noble closed its original store in 2014. So — what is that? — two stories in an entire decade? Putting those two aside, where are all the other inspirational David Beats Goliath stories? Uber changed the taxi industry, no doubt about it, but it’s not clear Uber’s business model will outlast the oncoming regulatory counter-attack, or that it’s even a sustainable business model in the first place.

And yes, Tesla is trying to “disrupt” the automobile industry, but the jury is still out on whether it will survive, let alone succeed; my money is on Tesla’s nameplate being acquired for a pittance by one of the big automakers.

And what about the Tech Giants we all fear today, Facebook and Google? Strangely, they didn’t disrupt any industry at all. They invented entirely new ones.

And so, when you really think about it, you realize that the tech industry is lying to itself — telling itself fables. We’re not disrupting lazy, hidebound industries. We’re building apps, or SaaS platforms designed for… other technology firms, come to think of it.

In the last decade, venture capital has poured nearly one trillion dollars of cash into technology startups. In that time, we’ve had two successful David-beats-Goliath stories (Netflix, Amazon), a handful of David-still-fighting-Goliath-but-Goliath-not-giving-up stories (Uber, Tesla). And a lot of Emojii Apps and Email-Marketing-For-Other-Tech-Companies stories.

Where has all the Disruption gone?

People smarter than I have pondered where all the Disruption Has Gone. Some say laws passed at the beginning of the decade, like Sarbanes-Oxely, have made going public so unattractive that companies now prefer selling out to corporate sugar daddies rather than destroying them. According to this theory, countless Netflix-like companies quietly sell themselves to their respective Blockbusters, rather than loudly competing with them.

Others say that Western capitalism is in its death throes, that economies are naturally prone to aggregation and concentration, and that we need the light touch of government to break up monopolies and ensure “fair” competition. (As someone who has personally enjoyed the light touch of government, more than once, I am dubious about this theory.)

But what if the answer to the question “Where Have the Disruptors Gone?” is not outside forces we can’t control (government regulation, End-of-Days Capitalism), but rather, something closer to home? What if the reason that industry disruption is rare is that we tech people are just plain lazy — as lazy as the companies we make fun of?

The thing is, it’s hard to destroy an industry. Industries don’t simply appear, fully formed, like Athena springing from Zeus’ head, fully grown and dressed in armor, lumbering around and ready to be disrupted.

Industries evolve. They start at point A, then move to point B, then address customer needs at point C. Industries and companies have benefited from a Darwinian natural selection, a co-evolution of customer need and vendor response, a waltz from one local optimum to the next. Structures that seem stupid or inefficient to outsiders who think they know better were created through an iterative process of real people solving real problems with real money on the line.

To put this into human biology terms: just because you can’t explain why your abdomen has an appendix, doesn’t mean you should rip it out in order to “disrupt” it.

Disrupting Isn’t as Easy As it Looks

If you study any industry, you’ll find a lot of these appendixes — that is, a lot of weird inexplicable organs that don’t seem to add much value, and which are crying out to be “rationalized” or cleaned up, but which are unfortunately attached to other parts of your body that are not so extraneous. I’m sure Elon Musk looked at the auto industry and saw a lot of dumb processes that could be done better or differently — from manufacturing, to retailing, to financing. But then again, those processes evolved over a hundred years of automobile production, and were the result of a lot of hard-learned lessons. Maybe Tesla’s Model Three production is troubled not because Tesla can’t produce enough batteries, but rather because Musk disrespected a century worth of industry knowledge, from inventory management to shop-floor design.

And there’s another thing. Disrupting an industry requires a deep, intimate knowledge of the industry being disrupted. Silicon Valley doesn’t like to admit this. It likes to tell itself that “management” and “technology” are two skills that are not industry-specific — that any good executive can parachute into any company, in any industry, and fix it. You can see why venture capitalists like that story: VCs are living, breathing embodiments of it! What, after all, is the typical VC curriculum vitae, except this: an executive hits a “home run” in one industry, and then suddenly feels qualified to pass judgement about the mettle and prospects of other executives, in other — possibly far afield — industries.

Which is preposterous, really.

Indeed, the only thing that is more preposterous is the idea that a twenty-year-old kid, just out of college, ought to be an executive at one of those VC-funded companies asked to disrupt that hundred-year-old industry the VC is looking to destroy.

All of these reasons explain why Silicon Valley is mostly stuck building SaaS email platforms, and emojii apps; and why VCs are funding these masturbatory ventures. Because doing the hard stuff, like destroying entire industries, is actually, you know, hard… and vanishingly unlikely.

So we tell ourselves stories, don’t we, about how we’re out to destroy entire industries, and overthrow traditional companies! About how we are building the next Netflix or Amazon, or Uber!

But for most of us, who are busy building web pages that help other web companies do web-ish things, these are merely stories. Twenty year olds aren’t going to disrupt anything, except perhaps my sleep, and neither are the VCs that fund them.

Meanwhile, all the grown ups will continue to provide real service to real customers, in unglamorous industries most twenty-year-olds have never heard of, and never will.

— Matthew Klein, Founder of Collective2

P.S. Hey, if you want real disruption, come check out Collective2. We’re actually destroying a real, fat, lazy industry — hedge funds — by building something better: the world’s first Internet-based, distributed hedge fund.

“If a trading strategy is so great, why sell it on Collective2? Why not just keep it to yourself and earn a zillion dollars?”

I’m presented with this question a lot.

Actually, “presented” isn’t quite the right word.

The question is not usually “presented” to me.

It is flung — the way dog feces are flung at the neighborhood crank’s house, the night before Halloween.

Sometimes even a friend will muster the courage to ask me the question. It happens usually while he’s drinking, and always with a knowing smirk — the smirk of the high-school debater about to deliver a coup de grâce.

I suppose in this age of Twitter wars and angry Facebook rants, I shouldn’t be surprised when someone comes up to me at a party and suggests that I’m a complete fraud, or that my life’s work is a scam.

But I’m not; and it’s not; and here’s why.

“The poor man’s hedge fund”

First, some background. Collective2 is the website I started 17 years ago. Think of it as a “poor man’s hedge fund.” (Actually, not so poor; many of the investors who use the site are wealthy and sophisticated by most people’s standards.)

The idea of the site is simple. If you are a good trader, you submit your trades in real time to Collective2 (or simply connect your broker account to us). Then other people can “follow” your trades in their brokerage accounts. Through the magic of software, the trades happen automatically. Followers pay you a flat monthly fee to follow your trades in their accounts.

Collective2 presents the performance, in real-time, of thousands of these trading strategies.*

In other words, Collective2 is a marketplace where trading talent can be bought or sold. Collective2 acts as a trusted third party which verifies the performance data of strategies on its platform.

“Why would a good trader offer his strategy on Collective2?”

That’s the question, then, isn’t it?

If you create a good trading strategy, why let other people use it for a modest amount of money (typically, strategy creators ask for between $100 and $200 per month), rather than keeping it all to yourself?

Actually, there are several reasons.

Leverage and risk

First, let me point out the obvious. If you’re going to be snarky and accusatory about Collective2, you might as well set your sights a bit higher.

The same question can be asked of virtually the entire financial industry. Why do top-tier hedge funds accept investor money? If the guys at Two Sigma are so smart (and they are), why don’t they just trade their own money from an unmarked building in Soho? Why go through the hassle of raising capital from investors?

Or more broadly, why have mutual funds? Why run a bond fund? If Bill Gross is such a genius (and he is), why does he bother accepting investor money, and suffering the indignity of annoying questions, or unfortunate P.R.? Why not trade his own private capital from his house in Laguna Beach, and when people ask him what he does for a living, he can just say, “I’m a beach bum. I don’t do anything.”

The answer is: leverage (people want more of it) and risk (people want less of it).

Even Masters of the Universe don’t have infinite cash sitting around. After all, many Hedge Fund Titans live in New York City: there are co-ops to buy, kids to private-school, restaurants to patronize. If you are a managing director at a top-tier hedge fund, and you have a million dollars in the bank, ready to invest, which would you prefer: to earn 20% on your money? Or 30%?

Letting other people invest alongside you, and making money on their money, is a form of leverage. (For those not fluent in finance: leverage means using borrowed money to make more money.) Leverage isn’t always a good thing, of course (you can lose more, too) — but if you have high confidence in your trading ability, using leverage can be a wise decision.

So too in the world of Collective2. No one offering a strategy on C2 is a Hedge Fund Titan — not yet, anyway — and so we’re not talking about the same order of magnitude. But listen, if you are a competent trader, and you have $100,000 sitting in your brokerage account, ready to trade, which would you prefer: to earn 20% on your money? Or 30%?

The mechanism through which leverage is achieved is different on Collective2: no one is allowed to collect “management fees” or “performance fees”; that is not permitted under U.S. regulations. Rather, your customers subscribe to your trading information, and pay a flat monthly fee to receive your buy/sell signals, win or lose.

But the effect is the same. Imagine you are a good trader, and you think that, without Collective2, you can earn 20% each year on your $200,000 trading nest egg. Now imagine that putting your strategy on Collective2 lets you earn an extra $5,000 each month in subscription fees from your followers. That’s the equivalent of another 30% on your capital. Sure, there’s no guarantee you will earn that, but if you build a good track record on Collective2, you can earn that much, and more. (As I write this, a popular strategy developer on C2 is earning more than $15,000 each month from subscriber fees.)

So, just like a Hedge Fund Titan — or just like a mutual fund manager — you can gain “leverage” on your own dollars by opening your strategy to the public.

Reducing Risk

Allowing outside investors to trade alongside you, and pay you a fee, also reduces your risk. Let’s be honest about that. A typical hedge fund charges “2-and-20” — which means they charge an investor a fee of 2% of the money invested with them, plus 20% of the investor’s profits. That 2% is charged no matter what — whether the fund wins or loses. It’s called a “management fee,” and in theory it’s meant to cover fixed expenses that happen every month at a hedge fund, no matter what: you know, rent, administrative assistants, legal and accounting, blow.

But money is fungible, and what you pay with one set of dollars is something you don’t have to pay with another set of dollars. One way to think of that 2% management fee is as a risk-reduction cushion. If trading doesn’t work so well in one month, you still get your 2%. When you’re managing a billion dollars, that’s a nice chunk of change.

Now, listen, if you stink up the place six months in a row, most investors will flee and take their 2% management fee with them. But you’ll get a bit of leeway — more so if you have a long and distinguished track record behind you. That leeway reduces your risk. That’s what you gain by offering your strategy to other people, instead of just trading it alone.

And again, the same incentives that exist in the hedge-fund world exist on Collective2. You sell your strategy for, say, $150 dollars each month. Get 20 subscribers, and that’s gross revenue of $3,000 each month, which comes in regardless of whether you win or lose in any given month. Just as in the hedge-fund world, your subscribers won’t stick around if you lose money, month after month. (And just as in the hedge fund world, you’ll be given a longer leash if your track record is more substantial.)

So, in addition to increasing leverage, putting your trading strategy on Collective2 reduces your personal risk by some small, but non-trivial, amount.

Building your career

So far, I’ve discussed the financial reasons why a legitimate, talented trading-strategy creator would put his or her trading strategy on Collective2. But there’s another reason, which is not related to money, but, rather, to career development.

Finance is a hard industry to break into. We’ve all read about the glamorous life of hedge fund managers, but how exactly does one go about getting a job at a hedge fund? You don’t fill out an application online, and — truthfully — unless you go to a top-five American university, you won’t see the face of a recruiter at your annual career fair.

I’ve already written about how stupid hedge-fund hiring practices are. But indignation won’t change the world. The fact is, it’s ridiculously hard to get a job at a hedge fund, and in finance in general, and probably always will be.

But there’s one thing “finance people” respect, and that’s money. Prove you can make it for them, and it doesn’t matter one bit whether you went to Harvard or Pomona State. Money talks.

Collective2 lets you build a public, verifiable track record. It’s out there, for everyone to see. Remember: on Collective2, your can’t claim in March that you woulda, coulda, shoulda bought Apple stock back in January. You have to make your buy or sell calls at the time they occur. Collective2 will publish your results. No matter what. Your track record is your track record.

Running a public track record, with other people’s money at stake, is a different beast than sitting alone in your room, wanking your own tiny brokerage account. The pressure makes some people crack. I’ve seen it happen at Collective2: a strategy manager is trading well, starts acquiring his first few paying subscribers, and then… he loses his mind. He just can’t take the pressure of having to perform publicly.

On the other hand, some people love performing in public — whether the performance is musical, or written… or financial.

So that’s the non-pecuniary reason that you can find good trading strategies on Collective2. Some people share their strategies with the public for reasons other than money: they are building their career, buffing their resume, trying to break into the business.

For all these reasons, there is always a possibility of finding a good trading strategy on Collective2. Nothing is guaranteed, of course. You can lose money as well as win. But if you’re looking for an alternative to the same old same old investing opportunities, come on over.



*  We label Collective2 results as “hypothetical” because (among other reasons) there is no single broker account that looks exactly like the results posted on our site. Even if a trading strategy is followed by live investors in real-life broker accounts, or is driven by the strategy manager’s own live broker account, everyone following a strategy can have different results, based on factors such as individual broker used (we work with many), when investors start or stop trading, how large or small they make their trades, whether they use stop losses, etc. And, finally, in many cases, strategies on Collective2 are not followed by real life broker accounts at all — this is particularly true for newer strategies that have not yet gained subscribers — and so results presented in these cases are based purely on simulated real-time prices, and these simulations have many inherent limitations. So, you know, caveat emptor.

Silicon Valley, here come the mobs with pitchforks

Hello, Silicon Valley, welcome to my world. The real world.

Welcome to the world of demagogues, of crowds with pitchforks, of mobs with torches. They’re coming for you. Do you hear them? They’re outside your window, braying for blood. Your blood.

For thirty years, you’ve been aslumber, warm in your Palo Alto beds, safe in your knowledge that no politician would bother you. Politicians didn’t care, not because they were too stupid to understand the technology you were creating (although that was indeed the case), but because they thought it was too unimportant to even warrant their attention. It was cute. It was a joke.

And, when you think about it, weren’t they right? What important thing had you ever done, for anyone, ever?

Apple was founded by two hippies, whose original business innovation was to sell computers which were almost, but not quite, ready for use right out of the box.

Intel’s idea was to make transistors out of silicon. Forget about whether any government official, anywhere, knew what a transistor was. Had any ever heard the word “silicon?” And of those that did, how many thought it was the stuff in their mistresses’ breast implants?

What about the internet? It’s remembered today, incorrectly, as a stepchild of military R&D projects, but in fact it was dreamed up by starry-eyed academics, as a combination of an inter-university messaging system, and a way to cross-reference academic papers more easily. How exciting.

Yahoo was a web page. You heard that right. A page. One. Two dudes in a room put a bunch of links together in one place.

Alta Vista was a search engine. It looked for matching words on that hippy-dippy academic publishing platform.

Google’s original business plan to to be another search engine, to supplement the one that already existed and that nobody cared about.

I could go on, but why bother. You see the point. Silicon Valley was left alone by the people in power, because power only cares about things that matter. Silicon Valley didn’t matter. It was pointless.


Media Coverage of Tech: “Aw, what cute nerds”

Oh sure, there was media coverage. But media coverage of Silicon Valley was always the same: enfeebling and emasculating. According to the media, Silicon Valley was the province of geeks, guys with taped glasses, social nincompoops, boys that couldn’t get laid. Doubt it? Look at these duelling cover photos of Bill Gates:

When I look at those covers, you know what I think?

I think: there’s a guy without a prom date.

Which made everyone happy — writers, editors, readers — because, sure, that dork made $350 million dollars doing some weird thing no one quite understood, but look at his glasses, for godsake.

Silicon Valley, it was a fun forty years, give or take. You were left alone in your little world, building your cute and pointless technologies. A few of you made a hundred million here, a hundred million there — all rather mysteriously — and no one begrudged it, because you were social incompetents — you weren’t able to use your riches to get laid — and you knew enough not to bother the politicians. You didn’t ask for permission; you didn’t ask for favors. You stayed out of politics, and politics stayed out of you.


So you need a little help to get your industry off the ground?

What a difference a few decades make. Silicon Valley has gone from political afterthought, to political mover and shaker. No longer content to be left alone, no longer willing to stand apart from politics, Silicon Valley has blundered into the political arena, bringing with it wealth and influence, trying to extract favors and cash.

Who is the poster child for Silicon Valley right now? Who is its wunderkind? Is it some nebbish dork with bad posture, and spindly arms, and a lack of political talent?

No, it is this man:

It is Elon Musk, our own real-life Tony Stark, who, through sheer force of will, and with awesome muscular guns popping out of his tee-shirt, runs not one, not two, not three… but four famous technology companies, which sport a combined market value north of $70 billion dollars.

Except: here’s the thing about our super-hero. Just like his fictional alter-ego, Tony Stark, Musk made most of his fortune sucking at the teat of the government. Tesla Motors, his most famous company, would not exist without government subsidies. The U.S. government has paid $7,500 to Tesla each time it sells a car to a rich person. Perhaps you consider it unfair that every U.S. taxpayer — regardless of whether that taxpayer is wealthy, or middle class, or poor — is forced to pay money to a Silicon Valley firm each time it sells a product to a wealthy consumer. If you do think it unfair, then you are in the minority, because California legislators, worried about the potential loss of that federal subsidy, are doubling down, and considering methods of extending it within the State Of California.

Musk’s other company, SpaceX, for all its bluster about putting colonies on Mars, and protecting the human species from asteroid-induced extinction, has one primary customer.

Is that customer another technology company, interested in building high-tech labs in space?

Is that customer an entrepreneur, with exciting dreams of starting a lunar mining operation?

Uh, no. That customer is you and me — a.k.a. the U.S. government, which has kept SpaceX afloat by pumping $5.5 billion taxpayer dollars into it.

Now, listen, before you post your devastating 140-character take-down of this article, let me say flat-out that I’m enthralled by Musk’s dreams; and think that nothing happening within the human species today is as exciting, or as important, as the goal of turning humans into a space-faring civilization.


To paraphrase Aeschylus, “Live by the sword; die by the sword.” If you make your fortune extracting wealth from the general population around you, and distributing it to your pet cause, regardless of how noble that cause may be, you should expect the population to come knocking.


Here comes the mob

And knocking the mob will come. Maybe not immediately, but soon enough.

In what form will Musk be undone? Will it be in the form of an investigation by securities regulators into accounting irregularities? Or will it be more benign: social derision within the blogosphere, jokes on the late-night talk shows?

When Tesla can no longer find a greater fool to fund its cash-burning operations, either through equity or debt financing, and when it collapses (or is bought by another firm for a sliver of today’s value) what will Jimmy Kimmel say? Which memes will loop endlessly on Twitter, showing Musk in some ridiculous pose?

If you want to see what crowds with pitchforks look like, here is a picture:

You remember Elizabeth Holmes? She had a moment of glory when her startup, Theranos, funded by all-star VCs and with a board of directors that read like a Who’s Who of the rich and powerful, was valued at billions of dollars. Theranos proclaimed that it had developed a radical new technology which would replace traditional blood tests with mere finger pricks!

Except, the chief scientist of the firm apparently took his own life, and then, soon after, it was revealed that the technology didn’t actually, you know, exist. And Holmes was banned from the blood-testing industry (a significant setback to an executive running a blood-testing firm), the firm was sued by investors and business partners, and Holmes’ net worth went from billions to… well, the value of a few black turtlenecks in a closet.

Look, as a fellow entrepreneur (not one in the billion-dollar, or even million-dollar club, alas), I sympathize with Ms. Holmes on a human level. Starting a company, and asking people to believe in that company, involves a lot of hocus-pocus, and misdirection, and willful faith. There’s a fine line — never very clear, truthfully — between entrepreneurship and outright fraud. Every entrepreneur, every day, in every way, basically challenges the world around her by asking: “Who are you going to believe? Me or your lying eyes?”

So my goal isn’t to castigate Holmes, nor to make excuses for her. It is to point out that the mobs with pitchforks came for her. They came for her because she wasn’t making a cute little pointless technology like a video game, or virtual reality glasses. She was diagnosing diseases. She held people’s lives in her hands.

But not only that. The mob came for her because Silicon Valley today is fair game. It’s fair game, because Silicon Valley has made the collective decision to enter the political arena.


Tech’s Biggest Lobbyists

It’s not just guys like Elon Musk, whose entire complex business model and operational process can be distilled down to two words: Government Subsidy.

Every major tech company has entered the political sparring ring. For example, here’s a quiz for you:

Question: Which two firms spent the most money lobbying for, and are most interested in, government regulation of the Internet?

Answer: Google and Netflix are the largest champions of requiring the government to set the price of internet bandwidth usage. Is it any coincidence that both companies benefit the most from subsidized bandwidth costs?

Here are the facts. Some people estimate that Netflix is responsible for 37% of peak-hour internet bandwidth use. Internet infrastructure companies (ISPs, cable companies, telcos, fiber firms) must scramble to provide capital and equipment to handle our endless appetite for binging on streaming video. Netflix, obviously, does not want to pay for these capital costs. Not directly, anyway. I mean, sure, they pay for some of it. But, like Tesla, which asks the government to take money from poor people and give it to rich people in order to buy cars, Netflix has asked the government to take money from people who don’t use Netflix, and give it to people who do, in the form of cash or inferior service quality.¹

Again, hold off on the Twitter criticism for just a moment. Even if you disagree with me, and think Netflix and Google are the good guys, and that their spending millions of dollars on political lobbying is meant to protect scrappy “innovators” from the maws of evil telcos and cable companies — even if you think that, I ask you to consider the implications.


When you step into the political arena, you become fair game

Need proof? Ask this man. His name is Mikhail Khodorkovsky. Here’s his photo “before”:

Khodorkovsky was an executive at one of the world’s largest petroleum companies. He was the wealthiest man in Russia. Doesn’t he look the part?

Now, look at the picture… “after.”

Khodorkovsky was arrested, enjoyed something nominally like a “trial,” and was sentenced to nine years in medium-security Russian prison. His wealth was confiscated by the state, and was redistributed to the Russia’s ruler, Vladimir Putin, and his cronies.

What was Khodorkovsky’s real offense? In 2003, he appeared on television and criticized Putin’s corruption. Nine months later, Khodorkovsky was arrested.

What is the lesson for Silicon Valley executives and company founders?


Every tech executive is a Khodorkovsky

Yes, yes, the United States is different than Russia. In the U.S. they don’t exactly throw you in jail for criticizing a leader, or opposing the government. Right?

Except Khodorkovsky wasn’t thrown in jail for criticizing Putin. Not technically. His actual offenses were: tax evasion, money-laundering, and embezzlement. Even if he did those things, in post-Soviet Russia, everyone did. Simply put, in Russia, you could not (and still cannot) run a business unless you had a, shall we say, expansive view of the law. Whatever Khodorkovsky did, every single successful person in Russia did.

It’s just that, Putin decided to enforce the regulations against Khodorkovsky singularly, and no one else.

How does that relate to the United States? Today the U.S. federal government employs 220,000 regulators, who enforce 185,000 written pages of rules. Are you following each and every rule? Are you sure? How would you know if you are? Have you read all 185,000 pages? If not, then you better hurry. Last year, another 4,000 rules were added.

And so, like Putin in Russia, the government here in the U.S. has a free “call option” on every business, every enterprise, every endeavor, every person within its borders. I guarantee that, somewhere, somehow, I have broken the law. I guarantee that you have broken the law. I guarantee that Musk has broken the law. And Google. And Netflix. And Facebook.

Some law, somewhere.

And so, when the mobs with pitchforks come, they can take back whatever they have given, and more. And they can claim you deserve it.


What does a mob look like?

“The mob with pitchforks” is a metaphor, of course.

For now.

In the United States, the mob with pitchforks manifests itself in different ways:


What I have experienced in “Finance” is what you will soon experience in “Tech”

People of Silicon Valley: whatever your personal politics, heed my warning.

I have personal insights that you do not yet possess.

My little company, Collective2, is a financial technology, or FinTech, company. (Our goal is to put old-fashioned hedge funds out of business, and replace them with a “distributed hedge fund” — one that every smart investor in the world can contribute to or benefit from.)

Because I participate in the world’s most-hated industry, “finance” — the industry where it is perfectly acceptable for mobs to call for executive arrests; where CEOs routinely agree to multi-million-dollar fines as a cost of doing business, rather than fighting them; where a small company such as mine (run out of my house) is subjected to subpoenas, surprise audits by regulatory agencies, and endless paperwork and compliance filings — because I live in that world — and because that world is coming soon to you — I encourage you to hear my advice.

Remember that when you ask for favors, you will pay a price for them.

When you seek self-interested “regulation,” you will receive it. And more.

When you request attention, it will be granted.

When you blunder onto the stage, the spotlight will follow.

Today, only the unlucky Silicon Valley companies fall under politicians’ gaze. Soon others will, too. Remember that today’s popularity is tomorrow’s disfavor.

The mobs will begin to ask questions. Demagogues will stoke their passions.

The pitchforks and torches are coming.

You have awoken a beast. It is stirring.


—Matthew Klein is the founder of the world’s first distributed hedge fund,



The policy of asking the government to set prices for internet bandwidth consumption, rather than letting market participants negotiate them, is called “net neutrality.” The appropriation of an inncouous-sounding term to describe a whole bundle of regulations, most of which are not related to carrier censorship of content, or restriction of access to small companies, was a p.r. coup.

Passive Investing: Perfect for This Age of Passive, Wimpy Men

Do you remember when Western Civilization produced men? I mean real men. Men like Alexander and Napoleon, men like Washington and Churchill, men like Joe Lewis and Babe Ruth.

Men who spit and drank and smoked, men who rode horses. Men who had girlfriends, and also wives; men who scratched themselves, and didn’t give a damn that you saw them do it, because they didn’t even know who you were; men who waddled, yes waddled, when they walked, because they had balls.

What sad specimens we men have since become!

Look at us. Weak and pathetic! “In tune” with ourselves and our spouses. Self-aware! Pajama-clad wards of the nanny state, environmentally conscious, quinoa-eating, unisex-man-purse-toting, namaste-quoting, mini-men.

Passive men.

Passive indeed! Everything about New Man is passive. Passive in the face of bullies, passive in the face of threat, passive in the face of risk.

Passive investors, too.

Because passive investing is what we’re told to do.

“Just buy an an index fund,” they lecture us, in that shrewish school-marm voice we remember from our childhood. “And make sure it’s a low-cost fund, because, you know, costs can add up over fifty years.”

Fifty years! Real men don’t think about fifty years. Real men don’t think farther than tonight. Alexander the Great died at the age of 32, after conquering the known world. You think Alexander would have cared which ETF had the lowest expense ratio? You think Napoleon would have worried about tax-loss harvesting?

Back in the old days, real men invested. They were in charge of their own fates. They stacked their chips high on the table, and when the crowd of onlookers oohed and ahhed about the size of their bets, those men put down more chips, and then didn’t even bother to look where the roulette ball landed, because they were too busy ordering another drink.

My colleagues in the FinTech business want to emasculate you. Betterment and Wealthfront are the hottest startups in FinTech, but as far as I can see, they have spent hundreds of millions of dumb venture-capital dollars producing the website equivalent of gelding knives. Robo-advisors have succeeded in turning investors into eunuchs. What is the “business plan” for robo-advisors, after all? It’s to take money out of the hands of people that earned it, and put it into the hands of… a math formula.

And not just any math formula. A math formula that everyone else uses. Because, after all, robo-advisors have the right formula. All the experts agree. You see, it’s simple. Just plug in the inputs (you age, your income, your state) and then the outputs shoot out, and so there’s no need for you to do anything else. Or even for you to stick around. So go away. We’ll take care of it from here. Go now. Yes, you. Go to yoga class.

Let me ask you a question. Have you ever known anything that works out because everyone else is doing it?

Here’s some “non robo” advice from a man, not a machine. Now that the rest of the world is going passive, lying supine on the ground, letting other people “optimize” and massage their money, maybe now is the time to be active. To put a little risk in your life. Or maybe a lot. To call your own shots. To try, maybe, just maybe, to beat the market, not just to match it.

Because someone has to beat the market. And if everyone else in the world is curled up in a fetal position, letting their robos run their financial lives — maybe that someone is you. Maybe now’s the perfect time to be a man. A real man.

My company, Collective2, is built for men — and women, too — who still have their pair. It’s built for people who want more risk, not less. It’s built for people who want to do exactly what other people aren’t willing or able to do: to be in charge of their own fate. It’s built for investors who understand that every investment also happens to be a gamble. It’s just that most people don’t understand that fact, until it’s too late.

Collective2 is built for real men. Men who waddle when they walk.

So get on your horse, partner, and come on over.

Why Only Sorbonne-Educated, Literature Ph.D.s Should Cut Your Hair

You get a haircut every few weeks. Everyone does. Men, women, children. Even balding men need a trim occasionally (as I’m finding out, sadly).

But what if I told you that you’ve been doing this all wrong?

What if I told you that your barber, or hairdresser, is terribly under-qualified. That you have been risking your hair — which is just a few centimeters from your brain, after all — to an under-educated, under-trained amateur.

What if I insisted you were making a huge mistake in your barber choice. Instead of your current choice, you should choose another kind of haircutter. A better one. This one should be qualified. He (or she) should be properly educated. He should hold a Ph.D.

In Comparative Literature.

From the Sorbonne.

If I told you that, what would you say?

You’d say I was crazy.

Because having a Comparative Literature degree from a French university has absolutely nothing to do with how you perform at cutting hair. Of course.

But wait a second. Such “crazy” advice is given to us every day. Very smart people, with net worths of millions of dollars… even billions of dollars… regularly follow similar advice.

I’m speaking about the hedge-fund industry. This is an industry that manages almost a trillion dollars of civilization’s wealth. The role of the hedge fund is to produce “alpha” — a fancy way to say that it is asked to produce “market-beating returns.” If you are a wealthy person who, over her lifetime has earned ten million dollars, you prefer not to leave all your cash sitting in a bank, earning negative interest rates, after inflation. You want your wealth to earn a return. And so you give a portion of it to a hedge fund.

Thus the “hedge fund industry” plays an important role in the financial world.

You would think, wouldn’t you, that the people who run hedge funds would want to hire the most talented traders and analysts to work at their firm. You would think that hedge-fund customers would insist upon such a thing. You would think that hedge-fund hiring departments would scour the world, looking for smart people who have creative and interesting ideas about how to manage money — how to create those market-beating returns while controlling risk.

Except… none of this is true.

In fact, the world of hedge funds is bizarrely insular. If you do not live in New York, if you do not live in London, if you did not win the birth lottery by being born in an English-speaking country, if you did not go to Harvard, if you did not get a job at Goldman… well, then, good luck getting a job at a hedge fund. I suppose you can apply, but… don’t let the door hit you on the way out.

Which is strange, when you think about it, because all those qualities: where you live, what language you speak, what name is on your diploma, whether you held a job at Goldman Sachs — all of those things are entirely unrelated to how you will perform as a trader or investor.

In other words, the hedge-fund industry operates as if it thinks all hair-cutters must hold Literature Ph.D.’s from the Sorbonne.

Everyone in the industry knows this is absurd — that the performance of any new hire is orthogonal to where a person went to school, or even if he did; or to where a person held her last job.

I’ll take this a step further. Really smart hedge-fund operators ought to know that hiring one more me-too Harvard ex-Goldman prop trader will generate, at best, me-too performance. Every Goldman clone will have similar “ideas,” will look in the same places for financial opportunities, will pile into the same lame trades, will follow the same stampeding herd.

Here’s an idea. What if we hired hair-cutters who were actually good at… cutting hair?

My company, Collective2, has a mission. It’s a simple one. We are going to destroy the entire hedge-fund industry. We are going to tear it down, burn it to ash, plow salt into its earth.

We think that anyone can generate alpha.

No, not that everyone can… simply that anyone might:

Here’s the thing about trading performance. It’s the one job in the world where it’s obvious who’s good at it, and who’s not. You simply look at the person’s track record. Nothing else matters. Not where a person lives. Not which company he worked at five years ago. The performance matters. That’s it. Period. Full stop.

My company, Collective2, is an open, peer-to-peer investing platform. Everyone publishes their trading, for everyone else to see. If you like someone’s performance, you can follow along, and trade the same way automatically in your broker account. (If people follow you, they pay you a subscription fee.)

Recently, I’ve been speaking to potential investors interested in investing in Collective2, the company that I run.

When I describe my company to potential investors, most people “get it” right away, but there are a few who look at me, their jaws agape, their eyes wide.

“You mean,” they ask, slowly, “that anyone in the world can post their trading track records on Collective2? That you don’t ask about their educational background, or where they live, or even who they are?”

“That’s right,” I answer.

“You mean,” they sputter, now agitated, “that anyone can act as a Strategy Manager… even really terrible traders?”

I always answer this the same way. I say: “Absolutely. And you know what? This is a feature, not a bug.”

Indeed, this is the beauty of Collective2. The whole point of it, actually. To tear down the high gates surrounding the castle of finance. To invite anyone, and everyone, inside. To let people’s performance speak for itself.

Because: if someone is good, their track record — fully visible on Collective2, trade-by-trade, for the world to see — will speak for itself.

And if someone is stinky — and believe me, there are lots of those people — that will be visible, too. And guess what? No one will pay any attention to that person.

Maybe in the old days, before the internet, before it was possible to track people’s trades in real-time, before we developed the technology to publish open, transparent results in real-time… maybe in those dark ages, it made sense to hire only an anointed few people with a certain pedigree, a certain diploma, a certain resume.


But those old days are gone. Sunlight has flooded in, showing the world as it actually exists. Now we can see who is good, and who is bad, at investing and trading.

Now we can hire people to cut our hair, who are actually good at cutting hair. The literature Ph.D.s can continue to wear black turtlenecks, and drink absinthe, and smoke Gauloises, and discuss Foucault; and life will go on for them as before.

But they will not cut my hair.

I’m going back to Gary the Barber, because he does a good job.

Collective2 Founder Matthew Klein on the genesis of “C2”

Listen as Charley talks to Matthew Klein, the CEO of Collective2, an investing web site where great traders from around the world ask Collective2 to track their brokerage results in real-time. Then other investors can “subscribe” to these traders, and automatically follow their trades in their own brokerage account.

Collective2 was founded in 2001. It has more than 100,000 registered users and 15,000 published strategies. Over $75 million dollars of investor capital is connected to the Collective2 platform.

Matthew Klein

Matthew Klein
Founder & CEO

Matthew Klein founded Collective2 LLC. In addition to leading C2, Matthew is also a novelist. He graduated from Yale University, and is a Stanford GSB dropout.

Matthew lives in Westchester County, New York, with his wife Laura, his two sons, and a whippet.



The Myth of “Money Always Finds Its Most Efficient Home”

This is a guest post by John Netto, a cross-asset class trader and author of The Global Macro Edge: Maximizing Return Per Unit-of-Risk. He is also the creator of the Netto Number, the Risk Factor Compensation System, and the Protean Strategy published on Collective2.

In March 2011, I began a literary journey that would last over 3000 hours, 200 weekends, 20 business trips, and would finally see its completion five and a half years later in October 2016. That journey was my 580-page book, The Global Macro Edge: Maximizing Return Per Unit-of-Risk. What set out to be a book on advanced strategies in the alternative investment space evolved into a comprehensive empowerment tool for investors, money managers, and advisers on how to enhance your own investment process, as well as manage and allocate to hedge funds and active money managers.

This journey was filled with numerous discoveries and why so much of the book is essentially “out-of-sample”. By that I mean much of the final content was not planned to be part of the original manuscript and experienced in real time as the book was being written. One of those key discoveries was the website Collective 2. It was such an important discovery because the book addresses what I believe are six huge myths on Wall Street and the problems they cause.

One of those myths is “money always finds its most efficient home”. In fact, I demonstrate anecdotally and empirically using websites such as Collective 2, that money often doesn’t find its most efficient home, or at least the time it takes to do so can be quite protracted.

During this journey, one of my most aspirational “aha” moments was when I discovered that the process of allocating capital is rife with inefficiencies.

I learned substantial allocations by large institutions were not necessarily based on what manager could generate the highest return per unit-of-risk. There were two reasons for this. The first was CYA (cover your backside) investing proto­col and the second was a lack of technology.

Allocators were not necessarily seeking the absolute best investment but, instead, the investment they could best justify to their bosses and investors. If an investment in a hedge fund with a storied history of success blows up, at least it’s defensible. However, if an investment with a manager from a nontraditional background, a start-up, or in a relatively obscure strategy suffers, it is easy for those in power to question the decision to invest in the first place. Collectively, there are allocators with control over trillions of dollars in assets who figure it is better for their careers to jump off a cliff with the crowd than invest in some newfangled, odd-looking flying device.

The second reason is one of technology. Most allocators can’t justify committing the due diligence resources that come from allocating to smaller, emerging managers. Whereas a large, established manager may have $500 million in capacity, a smaller manager may only be able to run his strategy up to $25 million before seeing noticeable degradation in performance. However, technology can go a long way towards solving this problem. If instead of doing extensive due diligence on a manager, it may be more cost effective to make a number of small allocations to prospective managers. Then, by using technology, seamlessly aggregate these small allocations into one account where you can monitor and enforce individual risk budgets.

I would much rather have 10 emerging managers each with a $1 million allocation running non-correlated strategies across a range of asset classes working within a predetermined risk budget than one manager working a $10 million allocation. Given the non-correlation benefits, it may be possible to allocate 2 million to each of those emerging managers and get a larger return in my portfolio with the same volatility as the allocation to the one large manager. However, cost, lack of know-how, and technology can be barriers for many in accomplishing this.

The good news is that Collective 2 can be a huge resource in finding those emerging managers, as they offer an array of tools and performance attribution on each strategy. Those who educate themselves in what metrics to look for and how to incorporate it into their investing process stand to benefit the most as the landscape of asset allocation changes in the years to come.

About the Author: 

Mr. Netto has conducted numerous live trading webinars where viewers watch his P&L, positions, and orders in real time for total transparency of his methods. He has appeared on CNBC’s Fast Money, Closing Bell, and Squawk on the Street, as well as Bloomberg, CNN, Fox Business Channel, and PBS. 

Mr. Netto is also the author of One Shot – One Kill Trading. Mr. Netto speaks, reads, and writes Japanese, Chinese, Portuguese, and Spanish to help him articulate his vision of the markets to an international audience. John Netto’s ability to convey esoteric concepts was put on display when he was featured in two documentary movies, Life on the Line and Ghost Exchange, where he simplified to viewers some of complex aspects of creating a point spread model on The Super Bowl and executing high frequency trading strategies. Netto served in the United States Marine Corps for over eight years and is passionate about Veterans’ causes.

Follow him on Twitter @JohnNetto

H e l p D e s k