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Start-ups take on hedge funds with ‘social trading’

Imagine you knew a friend of a friend who kept bragging about the killing they were making trading. You don't know where they were investing, all you know is that they are doing really well. But imagine if you could invest directly into that person's strategy and also make money like them.

This is the premise of so-called "social trading" platforms that have been on the rise aiming to shake up the hedge fund industry.

Darwinex is one of the latest entrants in the space. The company allows traders to sign up and people can buy into their strategy. The trader's trades and strategy are wrapped into a "Darwin". Users can buy a Darwin which means that any money they invest will be traded exactly how the trader would do it.

"There are traders who are better than your bank and financial advisor but you can't invest in any of them. We are here to turn those guys into an asset class you can then buy and whenever they win you make money along with them," Juan Colon, co-founder and CEO of Darwinex, told CNBC in a phone interview ahead of the Money 2020 conference in Copenhagen this week.

"The Darwin itself is like an ETF that you can buy and sell at any time."

Colon describes it as a "matchmaking service" for investors and traders.

"With hedge funds you are forced to date a guy and you don't know how it works out. But you don't know how it would have worked out if you dated 60 guys. You can lower your risk substantially by investing in more than one Darwin," Colon said.


Darwinex is currently launching an index which consists of different trading strategies pulled together by the company from existing traders.

Social trading has picked up in popularity. Darwinex has 1,000 live accounts which Colon said was growing at 10 percent per month. According to the boss of rival firm eToro, younger people are investing in new ways, driving the rise of social trading services.

"Generation X and Y are gaining more and more control over their money and they are interested in making more of their own decisions and using more on online and social platforms," Yoni Assia, chief executive of eToro, told CNBC in a phone interview.

eToro also allows users to invest their money in copying other traders. The trades being put on and the strategy is all visible to a user. This is different to Darwinex which keeps the trades and positions secret, and instead asks the user to invest in the Darwin.

Both platforms try to motivate traders with a cut of the profits people earn from the Darwins. The idea is to create competition.

'Huge industry'

Investing-focused start-ups have been popping up with competition increasing in the space. Still, it is early days, according to Assia, with plenty of room for a number of players.

"This is only the beginning of the internet finance revolution. If you think about e-commerce it's still in process and has been for the past 15 years. We have a beautiful 15 years of us," Assia said.

"99.9 percent of wealth management is managed traditionally and we will see more of that money move to more platforms like social trading. This is a huge industry."