Hedgeable

Summary

Hedgeable is a robo-advisor with a twist, offering sophisticated automated investing as well as an [em]exceptional[/em] value for accredited investors to get exposure to a broadly diversified venture fund. This review is about that Hedgeable venture feature.

• Investor Overview
• Company Information

Overview

Hedgeable is a “robo advisor” along the lines of Betterment, but with some key differences. For example, in exchange for a higher “wrap fee” than other robo advisors (starting at 0.75% compared with 0.25% for Betterment), Hedgeable claims to offer more sophisticated wealth management features, including pro-active downside protection (eg, reducing your exposure to certain asset classes to minimize losses). But this review is about one of their most interesting differentiators, which is their Alternatives feature, offering super-simple exposure to a broadly diversified seed and early-stage venture capital fund with no minimum investment amount. (They also offer an easy way to add Bitcoin to your portfolio through a partnership with Coinbase.)

Types of investments Hedgeable offers

Hedgeable has published a detailed whitepaper describing their venture investment philosophy and approach, including which platforms they tend to use, and how they allocate the money in each fund:

Hedgeable venture capital portfolios make investments in approximately five index funds, each of which invests in an estimated 25-100 underlying startup companies. We consider a diverse range of platforms through which we can obtain the core exposure, including but not limited to [CircleUp]({% link _platforms/circleup.md %}), [AngelList]({% link _platforms/angellist.md %}), and [OurCrowd](https://yieldtalk.com/r/ourcrowd/" _target="_blank). CircleUp is a platform focused on the consumer and retail startups, while AngelList focuses on high-growth companies in the consumer technology and enterprise technology spaces. To increase geographical diversification, we also leverage high quality platforms like OurCrowd that invest in Israel and across Asia.

What do you get when investing with Hedgeable?

When you invest through Hedgeable’s venture feature, as with many crowdfunding investment platforms, what you actually receive is an ownership interest in a special-purpose entity created for the investment, in this case a Delaware Limited Partnership. The partnership in turn invests in the various underlying companies or funds. Invetors receive a single K-1 each year reflecting any income or gains from the partnership.

Hedgeable fee structure

There is no additional fee for using Hedgeable’s venture feature (beyond the overall “wrap fee” which is a percentage of your total portfolio amount, ranging from 0.3%-0.75% depending on the total size of your Hedgeable account. The underlying venture funds Hedgeable invests in will charge their own fees (usually at a minimum a carried interest charge, and probably an annual fee for some as well).

Potential returns and cashflow

Investments via Hedgeable’s venture feature are high-risk investments in startups. Most of the investments have no explicit expectation of payments, dividends, or other cash flow. Most startup investments lose some or all of their value. While some investors achieve excellent returns from startup investing, that is a rare outcome and requires substantial diversification over time combined with very careful investment selection.

While Hedgeable’s venture feature can give you broad exposure to potentially 100+ different startups as part of one fund, successful angel or venture investing also requires diversification over long periods of time.

Regulatory framework and due diligence expectations

Hedgeable’s venture feature falls under a slightly different regulatory framework than most of the investment crowdfunding platforms (including most of the ones Hedgeable in turn invests in for their fund…):

Private partnerships like Hedgeable's are excluded from the definition of an investment company, and are not registered under the U.S. Investment Company Act of 1940. Instead, these partnerships fall under the U.S. Securities Act of 1933. According to this law, Hedgeable can offer its fund to accredited investors as long as they meet the standards that were described prior. Under Section 3(c)(1) of the Investment Company Act of 1940, partnerships like Hedgeable’s are compliant as long as no more than 99 individuals own it. Because of these restrictions, each Hedgeable fund is limited to accredited investors, and only 99 investors can allocate capital to each fund. When the 99 accredited investor limit is breached, Hedgeable opens a new fund.

The Hedgeable whitepaper describes their selection process, but ultimately investors should be aware they are turning over full control regarding which startups or funds to invest in to Hedgeable (and indeed even if/when to invest at all – I invested $5,000 using Hedgeable’s venture feature more than a year ago and a sizable chunk of that remains in cash).

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