Stocks and bonds are common investment options. While many people invest in these traditional assets, there are other ways to invest in asset management. Hedge funds and peer-to-peer lending (P2P lending) are known as investment methods other than stocks.

Hedge funds and peer-to-peer lending allow you to increase your assets regardless of the economy. Therefore, we need to understand which one is more efficient to invest in to increase our money.

In conclusion, investing in peer-to-peer lending is risky. There is also a possibility of getting scammed. On the other hand, if you invest in hedge funds, you can earn an 8-13% annual interest rate even for low-risk investments.

In fact, institutional investors are not using P2P lending but are actively investing in hedge funds. There is a reason for this, of course. Therefore, I will explain the difference between hedge funds and peer-to-peer lending.

Hedge Funds Manage Assets in Tax Havens

In order to understand the difference between hedge funds and peer-to-peer lending, we need to learn more about each. So, let’s first discuss hedge funds.

Not only institutional investors but even individual investors can invest in hedge funds. Although you need to open an account in an offshore tax haven where there is almost no tax, you can open an offshore investment account and invest in hedge funds by investing US$30,000 or more.

Any hedge fund in your country is a scam, and you must use a tax haven to invest in hedge funds. You increase your wealth by investing in major currencies such as the US dollar and the Euro.

For your reference, below is a screenshot of my offshore investment account.

On the other hand, when it comes to P2P lending, many countries have local companies that provide the service. Even in your home country, there are a number of peer-to-peer lending companies. There is no need to open an offshore investment account in a tax haven.

If you want to invest in hedge funds, you will need to send money overseas because your assets will be managed in a tax haven. This makes the process of investing more complicated than with a domestic peer-to-peer lending company.

Hedge Funds Have Many Types of Investments

There are many hedge funds to invest in. Many tax havens exist in the world, and countless hedge funds are active. Each hedge fund has a different investment strategy, and while some hedge funds have excellent performance, others have poor performance.

A typical hedge fund trades in stocks and bonds with many times the leverage. While there are these high-risk, high-return hedge funds, there are also low-risk hedge funds that do not invest in stocks.

For example, the following is a hedge fund that provides loans to foreigners who want to invest in Australian real estate.

If you invest in this hedge fund, the average annual interest rate is 9.27%. Hedge funds that invest outside of stocks have different investment targets, such as bridge loans, mortgages, and microfinance, etc. These non-equity investments are called alternative investments.

Therefore, if we include hedge funds that invest in alternative investments as well as hedge funds that invest in stocks and bonds, there are many types of hedge funds that can be invested in.

100% Segregated and No Worries about Fraud

Another great advantage of investing in hedge funds is that there is no need to worry about fraud. The reason for this is that by using an offshore investment account (or private banking account in the case of wealthy people), the invested funds are 100% segregated.

With segregated management, hedge funds cannot withdraw your money at will. This means that the hedge fund can only use your money for investment purposes, such as purchasing stocks and bonds.

In addition, you will be investing in hedge funds that are listed on Bloomberg (a major financial and business information provider in the US). In addition, all hedge funds are audited annually by an external auditor.

This is why you don’t have to worry about fraud if you invest in hedge funds properly.

Of course, if the hedge fund performs poorly and you receive a negative return, your assets will be reduced. But this is not a scam; it is your fault for investing in the wrong fund.

In P2P Lending, Individuals Lend to Micro Businesses

On the other hand, what are the characteristics of peer-to-peer lending? Unlike investing in a hedge fund, you invest with a peer-to-peer lending company in your country. In that case, all investments are in micro-enterprises.

The companies that borrow money using P2P lending have one thing in common: they are companies that want to be financed, but the banks are not willing to lend them money. In other words, they have only been in business for a year or two, or their company size is extremely small.

For these small companies, even borrowing a few tens or hundreds of thousands of dollars from the bank can be difficult. However, in order to expand their business, they need to get a loan. This is why they use peer-to-peer lending, although the interest rates are higher than banks.

Since they are small companies that need to borrow money at a higher rate than banks, the risk of bankruptcy is naturally high. However, by investing in these companies, you can increase your money.

Peer-to-Peer Lending with Low Yield

One thing you need to understand beforehand is that the interest rate for peer-to-peer lending is low.

For example, I have lived in Malaysia in the past. In Malaysia, there is a P2P lending company called Funding Societies, and I have used this service to invest. I thought it would be a good way to invest in an emerging country and increase my assets efficiently.

The following are the actual results of my one-year investment using peer-to-peer lending.

As you can see, the total profit I got from my P2P lending investment is RM6,549.28.

However, I need to subtract the loss due to default from the money earned through investments. The defaults that occurred in one year are as follows.

Thus, I have lost RM3,613.7 due to default. Therefore, the profit obtained from the investment was as follows.

  • 6,549.28 – 3,613.7 = RM2,935.58

The principal I used to grow this amount of money was RM80,000. Therefore, the annual interest rate is roughly as follows.

  • (2,935.5 ÷ 80,000) × 100 = about 3.67%

The annual interest rate is about 3.67%. Considering the cost payment to the management company and default, the annual interest rate is not high. We tend to think that we can get a high annual interest rate from financial services in emerging countries, but the yield is low even if we use P2P lending in emerging countries.

In the case of hedge funds, annual interest rates of 8-13% are possible even for low-risk hedge funds. Therefore, if you want to grow your money, P2P lending is inferior.

Risk of Fraud and Withdrawal Is Higher in Peer-to-Peer Lending

One of the biggest problems with P2P lending is that there is a high risk of fraud. Especially in the case of private placement P2P lending, there is a high probability of fraud.

In fact, scams related to P2P lending frequently occur in developed countries such as the US, Europe, and Japan.

On the other hand, a listed company may run a P2P lending service. In this case, the probability of fraud is very low. Also, the money is segregated.

However, in the case of P2P lending, scandals often occur even with listed companies. For example, the following is a scandal caused by a subsidiary of SBI Holdings (listed on the first section of the Tokyo Stock Exchange), one of the major online financial companies in Japan.

As a result of this scandal, the company has withdrawn from the peer-to-peer lending business. Even publicly traded companies can cause problems through fraud in P2P lending. It is important to understand that, unlike hedge funds, P2P lending has a higher risk of fraud.

A Safer Investment Method Is Hedge Funds

For this reason, it is better to invest in hedge funds instead of peer-to-peer lending unless you have a specific reason. This is because hedge funds offer a higher annual interest rate for retail investors, and there is no risk of fraud.

Different from P2P lending, hedge funds have the following features.

  • Low-risk investment methods are available.
  • The money is segregated, not privately placed.
  • Audited by external agencies.

When hedge funds lend money to individuals or companies, they make investments with little or no risk. They do not lend money to start-up companies like P2P lending.

Also, hedge funds operating in tax havens keep 100% of their clients’ money segregated, as mentioned above. In addition, they are audited by outside agencies and are required to present information about their bank accounts and investment accounts to the outside agencies, so they cannot provide false figures in their fact sheets.

Of course, if you invest in a hedge fund located in your country, you will be scammed just like with P2P lending. However, if you invest in hedge funds in tax havens in the correct method, you will not be scammed.

Institutional Investors Are Not Using P2P Lending

The reason why investing in hedge funds is better than P2P lending can be easily understood by checking how institutional investors and family offices are managing their assets.

Institutional investors include life insurance companies and pension funds. Individuals with more than US$100 million in assets may also be managing their assets as family offices. These asset-rich institutions and family offices do not use peer-to-peer lending.

On the other hand, when it comes to investing in hedge funds, institutional investors and family offices are actively adopting it. For example, the following is the portfolio officially reported by the Harvard University Foundation.

In the case of the Harvard University Endowment, the largest percentage of investments is in hedge funds. On the other hand, they do not use P2P lending. The reason is simple: using peer-to-peer lending increases the risk of fraud.

On the other hand, when investing in hedge funds, even though the investment performance may be negative, there is no risk of fraud if we invest correctly. Also, if we use a low-risk hedge fund, we can get a stable return every year.

When comparing hedge funds and P2P lending, the profits and fraud risks are quite different. If you want to increase your assets as an individual investor, it is better to invest in hedge funds instead of P2P lending so that you can increase your assets safely with a high interest rate.

-If Your Investment Funds Are Small, You Should Invest in Stocks

However, as mentioned above, you need to prepare a large amount of investment capital to open an offshore investment account. While you can start investing with as little as $100 in peer-to-peer lending, investing in hedge funds requires more than US$30,000 in spare cash.

Therefore, if you do not have a large amount of money to invest, you cannot invest in hedge funds. In that case, try to invest in stocks instead of P2P lending. Investing in stocks is risky, but it is widely known that, for example, the S&P 500 (an index that invests in the 500 major US companies) has an average annual interest rate of 7-9%.

You can invest as little as $100 in stocks. In any case, you should avoid using P2P lending because of the high risk of fraud and default, plus the low yield.

You Should Understand the Characteristics of Investment Methods

Since there are many ways to manage your assets, you need to understand which investment method is superior. A useful criterion to consider at this point is whether it is an investment method that is made by institutional investors and family offices. If you use this criterion, you will find that you should not use P2P lending.

P2P lending has low yields, and it also has a high risk of fraud and default. On the other hand, there are a variety of hedge funds that adopt different investment strategies, and the funds are 100% segregated, so there is no risk of fraud.

Although you need to use tax havens and send a large amount of money overseas, investing in hedge funds allows you to increase your assets efficiently.

Also, if you have little money to invest, you cannot invest in hedge funds. In this case, you should invest in stocks instead of using P2P lending. This way, you can earn excellent annual returns without the risk of fraud. Make sure you understand these differences and invest in the right way.