The main idea behind CopyFunds is to bring online traders closer to the investment opportunities available to hedge fund investors at a fraction of the investment requirement. Each CopyFund is composed of an assemblage of investment instruments compiled around an idea, theme, market or preset algorithm. eToro currently offers several types of CopyFunds:
Top Trader CopyFunds
A Top Trader CopyFund is based on copying a number of traders (as many as 50) chosen either by the eToro system algorithm or by eToro’s investment committee based on a certain set of criteria. Instead of doing the hard work of searching for traders and allotting funds to copy them individually, with a Top Trader CopyFund, you can simply let the algorithm do the work for you.
eToro currently offers four CopyFunds: Quarterly Gainers, Top Active Traders, Trending Traders Moderate Risk and Positive Copiers Trend. When choosing which fund to invest in, eToro conveniently displays the projected gains as well as the risk score for each fund.
Quarterly Gainers looks like the safest investment. It is based on copying up to 50 traders chosen for their consistent gains over the last quarter with low risk. At just below 12% gains over the last 12 months and a risk score of just 2, it looks like a very solid investment. The fund is recalibrated every quarter to include new traders that fit the algorithm’s criteria and exclude those whose gains or risk score no longer meet the standard. The allocation of funds is made based on gains, so top gainers will weigh more heavily on the CopyFund’s overall performance, while those with lesser results will have a smaller impact.
Top Active Traders seems to apply much of the same criteria as the Quarterly Gainers CopyFund, with the exception that the fund includes some slightly riskier traders and applies a very tight Stop Loss that immediately excludes any trader that activates it. Again at 19% gains over the last 12 months, and a low risk score of 2, this is another very viable-looking investment option.
The last two CopyFunds eToro offers are both based on trending popularity rather than gains and are managed by committee rather than an algorithm or automated Stop Loss. Trending Traders Moderate Risk is the riskiest of all four, including traders with risk scores that go all the way up to 7. It might be safest giving it a miss unless you have an appetite for risk. After all, the fund’s stats currently display a 60% gain over the last 12 months.
Lastly, the Positive Copiers Trend CopyFund picks traders based on similar criteria with the exception of the risk score, which is limited to 4. It is worth taking into account that these two CopyFunds are based on popularity among the eToro network and many of the traders included in them have yet to show any long-lasting results.
In the case of this class of investment instruments, it is a bit of a mystery what the “Copy” in CopyFund refers to, as they are virtually identical to classical investment funds in that they combine a variety of market instruments based on a common theme - no copying per se involved. The selection of these Market CopyFunds is much greater than the Top Trader variety and most of them focus on different segments of the stock market, with some ETFs, indices, and metals are thrown in for diversity.
For instance, one can invest in a Big Banks CopyFund, which groups together all the banking company stocks among eToro’s stock offering, or in a Food and Drinks CopyFund, which...well you get the idea.
Some of the more interesting options include a “Panic Mode” fund, which goes short on the main global indices and long on metals, basically intended to capitalize on a market crash situation in which stocks are collapsing and investors are scrambling for safe havens in stable commodities such as precious metals. This is a good idea in theory, although currently, this fund projects a -32% gain based on data from the last 3 years, presumably because stock markets have been relatively prosperous. However, this fund will certainly come in handy in a pinch.
All of the Market CopyFunds are managed by eToro’s investment committee, which means that the instruments are chosen and calibrated manually by market experts rather than algorithm on a periodical basis. This is probably as close to classical managed investment as social trading gets, especially considering that eToro has opened the door for partners to create their own CopyFunds, which means that traditional investment firms have a chance to get involved as well.
CopyFunds pros and cons
When all is said and done, CopyFunds are a managed investment solution for the social trading crowd, with everything that this entails. Investing in one means that you will have very little involvement in your investment and that your gains will be mostly long term.
For those who prefer this somewhat more old-school mode of investment and who haven’t been able to afford the inordinate investment capital required by most traditional hedge funds, CopyFunds are a dream come true. Most of them are much less risky than a direct market or copy trading and there is very little active decision making involved.
However, many traders will find that this mode of investment is less exciting than copy trading, as it swings the balance of using your own wits to relying on someone else’s expertise. Some would say that the beauty of copy trading is that it leaves just enough management decisions in the hands of the copied trader while leaving trading decisions up to the copied traders, and in the case of CopyFunds this is simply no longer the case.
In addition, the current entry requirement to invest in an eToro CopyFund is $5000. Albeit this being a fraction of what is demanded by institutional hedge funds, it is still a rather hefty sum that not all online traders can afford. Take this into account when deciding whether or not CopyFunds are your cup of tea.