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New Fund Launching That Uses Artificial Intelligence to Pick Loans
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Peer to Peer Lending
New Fund Launching That Uses Artificial Intelligence to Pick Loans

New Fund Launching That Uses Artificial Intelligence to Pick Loans

Peter Renton·
Peer to Peer Lending
·Sep. 3, 2013·3 min read

Ranger Capital

Gary Melara has been working with artificial intelligence (AI) programs for decades. So, when he first considered investing in Prosper and Lending Club back in 2009 he wondered if he could apply that technology to his loan selections. With the wealth of data that Prosper and Lending Club make available he was able to do just that. He has been investing using his AI program since early 2010 with some impressive returns.

Scott Canon is the president of Ranger Capital, a $3 billion investment management company based in Dallas offering both traditional and alternative investment products. He became interested in peer-to-peer lending last year and began exploring the space. Like most of us he was impressed with the high yields and low volatility of this new asset class.

To create a successful fund Scott knew he needed a top-notch portfolio manager who could create a model to generate the best ROI. He interviewed several people for this position including Gary. It was very clear to him that Gary’s approach was by far the best and his external consultants agreed. Gary was also the best fit culturally for Ranger Capital. So, they began laying the groundwork for putting together a fund.

I chatted with both Gary and Scott last week as they told me about their new fund, Ranger Specialty Income Fund, which will be launching shortly. The fund will be investing in Lending Club and Prosper notes initially but down the road they may expand to other high yield opportunities including student loans, small business and international lending platforms.

The Artificial Intelligence Algorithm

I was curious about Gary’s AI algorithm and how it worked in picking loans. He calls his system TruSight Technology. While he wouldn’t give away any details he did say this. His algorithm does not just pick the same popular loans that most of the other credit models also pick. It goes much further. Because his algorithm takes a more holistic approach he will often choose loans that others are avoiding. Here is what Gary said when I asked him why an AI system is better than traditional statistical analysis:

AI enables more profitable loans to be selected because diverse and complex patterns can be recognized unlike “tunnel vision” from filters or statistical analysis.

Here is a brief summary as to how the AI algorithm works:

  • Takes the 35-45 most significant data fields from Lending Club and Prosper.
  • TruSight evaluates each field in complex combinations with other fields.
  • Only the fields and their relationships to other fields that actually impact loan ROI are used.
  • Combined confidence from different algorithms is required to select a loan.
  • Isolates loans with largest spread between borrower rate and charge-off risk.

They said they would have no problem deploying capital into Prosper and Lending Club because they don’t have to compete with everyone else for the so-called best loans. There are always loans available with their algorithm so they don’t have to focus on the mad rush for the new loans. Although, Gary did say he will also try and secure his share of the most popular loans assuming they meet his requirements.

The other unique feature of having an AI algorithm is in its adaptability. If underwriting changes at Lending Club or Prosper, or the macroeconomic environment changes the algorithm can quickly adapt with it. Also, the team has augmented the AI process with a committee of consumer credit experts to help the fund.

Like every other fund in this space The Ranger Specialty Income Fund will be available for accredited investors in all 50 states. It will also be available for international investors. The minimum investment is $250,000 and they are going to start raising money for their fund shortly. If you are interested in learning more you can contact Bill Kassul at [email protected].

Disclosure: This article is for information purposes only and is neither an endorsement nor a recommendation to invest in this fund. Also, I have received no compensation whatsoever for writing this article.

 

  • Peter Renton
    Peter Renton

    Peter Renton cofounded Fintech Nexus as the world’s largest digital media company focused on fintech before it was acquired by Command. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

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