UpDown Gives Investors Ups With No Downs

UpDown is a virtual investing social network that rewards exceptional portfolio managers for their performance. The company closely observes which investment strategies perform the best and then applyies them to a real stock fund seeded by Joachim Schoss, an incredibly successful Swiss angel investor. Cash inflows from the real fund are absorbed mostly by the company, but the remainder rewards its top performers. Currently the cash disbursements are relatively small; the leading investors have reigned in approximately $1,000 to $3,000 each. But kickbacks will presumably continue to grow as the fund becomes larger. Regardless, virtual investors appear to be getting all of the upsides, namely riskless returns, with no real downside.

At the core of UpDown is the widely recognized and discussed theory of the "Wisdom of The Crowds," which maintains that the aggregation of information in groups results in decisions that are often better than those that could have been made by any single member of that group. The theory was recently popularized by James Surowiecki's book and is closely related to crowdsourcing, a concept adopted by many web startups in the last two years.

The company, led by Michael Reich, Georg Ludviksson and Phuc Truong (all Harvard MBA candidates), is not the first to apply "Wisdom of The Crowds" to investing. ZeccoShare, Covestor and Cake are all community-driven online investment platforms that rank investors and allow users to give and receive recommendations and advice through direct messaging and discussion forums. What remains to be seen with investor networks is whether or not moral hazard will come into play. Like most crowdsourcing applications on the web, some users will establish themselves as great influencers, or "experts," based on their recommendations or performance. These experts could potentially sway their followings to make poor investment decisions, mistakes that could be highly profitable to the influencer.

However, UpDown seems to mitigate this risk; after all, the money that the players invest is fake and the kickbacks are not significant enough to be worthy of exploitation. I am very curious to know what technology the founders are applying to their analysis of the user performances. I imagine that the process of picking, choosing, combining and weighting different investment strategies is no walk in the park. Hopefully we will learn more their analytics as the company matures. In late January, UpDown increased its funding to $1.2 million and is poised for growth in 2008.