Online Lender SoFi Starts Hedge Fund to Invest in Its Own Loans

  • Fund could also invest in debt from other online lenders
  • Vehicle is designed to fuel SoFi's growth, tap new investors

Social Finance Inc., a rapidly growing online lender, is hoping to stoke investor demand for the debt it originates by starting a hedge fund that will buy its own loans -- and potentially those of its competitors.

In recent weeks, the company established the SoFi Credit Opportunities Fund and raised $15 million from investors, according to a regulatory filing and a company spokeswoman. It’s seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt.

SoFi, as the lender is known, and its competitors rode a wave of investor demand over the past few years that fueled a boom in originations. Concerns about the economy and consumer debt have caused some of that enthusiasm to cool. As a result, online lenders are trying to meet their growth ambitions by pursuing new strategies to entice investors.

The hedge fund will initially buy SoFi loans and could eventually put half of its capital into debt from other online lenders, according to Debra Jack, the spokeswoman. With no annual management fee, the fund will charge 25 percent on returns above 3 percent, plus the short-term government debt rate, she said.

Independent Trustee

To avoid conflicts of interest, the fund will have an independent trustee. SoFi loans must be bought at prices set by other investors, according to Jack. The Wall Street Journal reported on the strategy late Tuesday.

Begun in 2011 by classmates from Stanford University’s business school, SoFi developed a popular way for graduates of top-tier universities to refinance student debt. The company has since branched out into mortgages, personal loans and wealth management.

Chief Executive Officer Mike Cagney has said his goal is to render banks obsolete by rethinking the way firms relate to customers. Key to his strategy is making new clients feel like they’re joining an elite club of strivers. SoFi refers to customers as “members” and hosts networking events where they can mingle over cocktails and free food. In a Super Bowl ad this year, the company said it provides “great loans for great people.”

SoFi’s Growth

Growth has been swift. In 2012, SoFi funded about $90 million of loans. These days, it originates more than $1 billion a month, Cagney said in an interview in February.

The company relies on credit facilities from other financial institutions to make loans, but has historically sold them off after a few weeks. One of the company’s main strategies for getting the debt off its books has been to bundle loans into securities. That approach can run into snags in choppy markets.

There is some precedent for an online lending upstart establishing a mechanism to buy its own loans, though not those of other platforms. LendingClub Corp. has a unit called LC Advisors that has helped investors buy debt the company arranges.

Cagney, a former Wells Fargo & Co. derivatives trader, is no stranger to hedge funds. In the mid-2000s, he started Cabezon Investment Group, which makes macroeconomic bets on currency, fixed-income, equity and commodity assets. He still works part-time there.

Closely held SoFi said it became profitable in 2014. In September, it raised $1 billion from a group of investors led by SoftBank Group Corp., the Japanese telecommunications and Internet company.

Last month, SoFi said it had hired former Deutsche Bank AG co-Chief Executive Officer Anshu Jain as an adviser. At the time, Cagney said that Jain would help SoFi think through how it uses its balance sheet, as well as how to approach potential capital-markets partners.

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