A Primer on Social Trading Networks – Institutional Aspects and Empirical Evidence

P. Doering; S. Neumann; Stephan Paul;

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ABSTRACT

Social trading networks provide access to an innovative type of delegated portfolio management. We discuss institutional aspects of these platforms and point out that, as an intermediary, they are able to reduce information asymmetries between investors and portfolio managers. Using a unique dataset comprising transactions from the four major network providers, we show that the users on these platforms yield non-normal returns and exhibit a relatively high tail risk. We then apply return-based style analysis and find that they deploy dynamic trading strategies and follow directional approaches. Hence, they bear substantial systematic risk within any short-term period. Throughout the article, we illustrate that social trading networks provide access to hedge funds-like returns, but in contrast offer a high transparency, liquidity and accessibility.

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