Trading on "Private Information"

By Wayne Mulligan, on Thursday, March 27, 2014

(Editors Note: This is Part 1 of a 3-Part Series)

We recently received this question from a reader:“Matt & Wayne, I like your weekly articles a lot. They’re really informative.  Unfortunately, I can’t invest in the opportunities you write about because I’m not an “accredited investor.” I know the laws around this are changing soon, but is there anything I can do right now to make money from your ideas?”

Perhaps you’ve been wondering the same thing.

After all, until the final section of the JOBS Act passes – the part that allows all investors to invest in private start-ups – most of the deals we discuss are only available to accredited investors.

However, there are ways that non-accredited investors can profit – right now – from Crowdability’s private-market insights.

Some of the largest hedge funds in the world are doing it already...

Here’s how:

In brief, they use information about private companies to make a killing in the public market.

It’s a strategy we call “Private Alpha” – and it’s not just for hedge funds anymore...

What is “Alpha?”

“Alpha” is a term that hedge fund managers use.

It describes their investment performance relative to the broader market.

A fund that beats the S&P 500 by 5%, for example, has an alpha of “5.0.”

Hedge fund managers obsess over this metric. It’s the central number they highlight with shareholders, or potential new investors, to justify their lavish fees.

It makes sense, then, that hedge funds use any number of proprietary methods and under-the-radar information sources to gain alpha.

OK, So What’s “Private Alpha?”

I recently had breakfast with a fund manager in NYC. I can’t mention the name of his fund for confidentiality reasons, but he personally manages more than $2 billion.

He told me about a successful strategy he’s been using for the last few years – this is the same strategy we’re now calling “Private Alpha.”

Essentially, his fund studies hundreds of early-stage startups. They look for companies that are growing rapidly, or addressing fast-growing markets.

When they find evidence of a “break-out” trend, they use that information to inform a trade in the public markets.

As I sat listening to him, sipping my coffee, I didn’t think much of it. Then he sprang the punch line on me:

He’d used this strategy to generate a 900%+ return on a single trade...

In less than 12 months.

I was stunned… and intrigued.

Digging deeper, I found several fund managers using the same strategy. Each had a unique way of applying private company insights to create public market returns.

I discovered that there were three common methods for executing the Private Alpha strategy.

Today, we’ll look at the first one...

Method #1 – “Rising Tide”

Before Groupon was public – and long before its fall from grace – it was the darling of the tech world.

Given its momentous growth trajectory (it was the fastest growing company...ever), top-tier venture capitalists were fighting tooth and nail for the right to invest.

But the hedge fund guys didn’t bother joining the fight.

Instead, one particularly savvy fund manager used evidence of Groupon’s early success – while it was still private – to find profits in the stock market.

More specifically, he found a small-cap company called TravelZoo (NASDAQ: TZOO).

TravelZoo had been around for a decade. They made money by advertising special travel deals.

Groupon, on the other hand, promoted discounted “local” deals (e.g. 30% off dinner at the local Italian restaurant) and took a cut of the transaction.

Toward the end of 2010, impressed with Groupon’s success, TravelZoo decided to copy their model. They moved into selling local deals.

The savvy fund manager believed that, just as a “rising tide lifts all ships,” once TravelZoo figured out how to sell local, they’d be rewarded with a surge in revenues – and a surge in stock price.

Boy, was he right.

When it first launched its local deals program, TravelZoo was trading at $15.

9 months later it was trading at $94 – a 526% gain.

The Basis for Successful Trades

The “Rising Tide” method has been used for many other successful trades.

Here’s another example...

Airbnb is a hospitality startup. It lets regular folks rent out rooms – or their entire home – to travelers. If you’ve been reading Crowdability, you’ll know the company has been on a tear as of late. Recent estimates peg its valuation at $10 billion.

Airbnb is still private, but there’s a public company doing something similar – HomeAway (NASDAQ: AWAY).

Two years ago, AWAY was trading at $19 per share.

This February, mirroring the growth of Airbnb, the stock peaked at $47.74 – more than doubling in 24 months.

Again, a rising tide lifts all ships...

Crowdability Can Help

To take advantage of this strategy, first you need to find evidence of a break-out trend that’s fueling material growth in the private markets.

Crowdability can help you with that – just keep an eye on our articles, especially the ones about megatrends.

Then you need to leverage that info to invest in companies riding that same wave – but in the public markets.

In the very near future, we’re going to show you how to do that, too.

Next Time:  Method #2 – “Disruptors vs. Disrupted”

Next week I’ll review a second way to take advantage of the Private Alpha strategy.

This one allows you to generate not one, but several trading ideas based on private-market insights.

In the meantime, please write in with any comments or questions.  We covered a lot of ground today!

Send all inquiries to:

Happy investing!

Best Regards,
Wayne Mulligan
Wayne Mulligan


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Tags: Airbnb Private Alpha Private Equity Groupon

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