Titan is Building a Hedge Fund in Your PocketBy Blaire Meckler
Titan is on a mission to make elite investment products and experiences accessible to everyone. The company launched in 2018 with its first product, a hedge fund strategy, and plans to expand into much more in the future. I had the chance to sit down with co-founder, Clayton Gardner, and hear about how he and his co-founders came up with the idea for Titan and their plans to build the next BlackRock on your phone.
Making Active Management Accessible
Titan’s founding team, Clayton Gardner, Joe Percoco and Max Bernardy, spent years working for hedge funds building sophisticated investment products for their clients, but when it came to managing their own finances, they felt that both the tools and the experiences available to them were completely different. This frustration became the inspiration for Titan, the first hedge fund available to anyone with at least $1,000.
Their first product is a long/short equity strategy, a common offering of many hedge funds. Their software algorithm analyzes the quarterly 13F filings of the top five percent of hedge funds, to build a “best of the best” portfolio, consisting of the top 20 stocks held by these funds. Then, based on each client’s individual risk profile, a portion of his or her investment is allocated to an ETF that goes up when the S&P 500 is down. This “short” is a hedge designed not only to mitigate losses, but also to keep clients invested for the long-term, even when markets are down. Here’s a very simple diagram they include in their investor materials to explain how the portfolio works:
A snapshot from Titan investor materials explains how their hedge fund strategy works
Not only is Titan focused on delivering a top notch investment product, but they are also serious about making the white-glove experience typically only available to the uber-wealthy more accessible to anyone. They publish insightful yet easy-to-read research reports on the stocks they’re long on and push out periodic e-mails to share quality insights as to what is going on in the markets. They also produce in-app podcasts and videos, such as the one below, where Clay explains to investors in a very simple way why the market overreacted to Facebook’s quarterly earnings report and why it’s a reason to stay long on the stock, rather than sell:
Titan co-founder, Clayton Gardner, explains in an instructional video why Facebook stock’s drop is a buying opportunity
A software-driven strategy enables Titan to maintain a lean cost structure and charge a one percent management fee on assets invested, as compared to a traditional hedge fund that charges two percent on assets and an additional 20 percent of profits earned. And so far the strategy is earning its keep, as Titan has outperformed the S&P 500 market benchmark so far in 2018 (up 18 percent vs. 11 percent), net of fees.
Since launching in February 2018, Titan has accumulated over 20 million in assets under management on mostly word of mouth and referrals. They just graduated from Y Combinator this past August and closed on a $2.5 million seed round led by them. The round included the co-founder of Y Combinator, Paul Graham, its president, Sam Altman, and Gmail creator, Paul Buchheit, personally, as well as Box Group and the venture arms of several hedge funds, including Maverick Ventures, who see potential strategic value in offering Titan products to their investors down the road.
Wealth Tech with a Human Touch
The robo-advisor industry grew to $200 billion in global assets under management (AUM) in 2017, which stands to reason as millennials, the first digitally native generation, begin to accumulate wealth and invest for the future. And with millennials set to inherit $30 trillion over the next 30 years from baby boomers, it is no wonder that both new upstarts and large incumbents across investment management are rushing to cater to their investment needs. The leading pure play robo-advisors are Betterment, with $14 billion AUM, and Wealthfront, with $10 billion AUM, while traditional wealth management giants, like Vanguard, Charles Schwab and Fidelity each offer their own robo-advising platforms and actually make up the lion’s share of assets managed in the space. Robo-advisors typically invest in low-cost, passive exchange-traded funds (ETFs), which are securities that track an index, a commodity or a basket of assets just like an index fund and trade like a stock. This passive investment strategy allows them to keep fees low, typically ranging from zero up to 0.30 percent of assets under management. Titan is differentiated from the pack in that it is the first mobile platform to offer actively managed products, like a hedge fund, thus their slightly higher one percent fee.
“We’re making a bet that this younger generation will want a more active and engaging approach to their money being managed, and we want to be that de facto player.”
– Clayton Gardner, Co-Founder of Titan
Titan believes that millennials, who tend to crave authentic and transparent connection with the brands they consume, will look for the same in a money manager. Thus, they are laser-focused on building a strong brand and delivering an excellent, transparent customer experience to all their clients.
While Titan is the first of its kind, there is little stopping another giant in the space with more resources from also offering active management products. But with BlackRock‘s recent announcement of a partnership with Acorns, the fast-growing micro-investing app, perhaps a partnership with or acquisition of Titan is just as likely of an outcome. The fact that Titan offers its clients no lock-ups, allowing them to withdraw their money at any time, is also cause for concern as it could backfire if markets really go south. Right now the team sees their biggest challenge as scaling the business, while still maintaining the high-touch customer service they deliver to their clients. Clay talked about potentially using machine learning as a way of delivering personalized text-based communication to each client based on his or her specific situation or needs.
Last month, StartU featured EquBot, who is democratizing the use of artificial intelligence (A.I.) in the investment process. They’re giving retail investors access to the power of A.I. with two ETF products that trade on the New York Stock Exchange Arca as AIEQ and AIIQ. Both EquBot and Titan are on a mission to make sophisticated investing products available to everyone.
Titan co-founders (from left to right): Max Bernardy, Joe Percoco and Clayton Gardner
A Shared Dissonance
Clay Gardner and Joe Percoco met on their first day as undergraduate students at Wharton. A group project in Management 100 brought them together, and the rest was history. Though both pursuing different dual degrees, Clay in Engineering and Finance, and Joe in Economics and International Studies, they each pursued careers in finance after school and wound up working for hedge funds managing billions of dollars.
“We had each spent four or five years working for elite institutions, but ultimately we were frustrated that the way we were investing ourselves and telling our family and friends to invest…was just dramatically different than the options and experience that we were building for our clients.”
– Clayton Gardner, Co-Founder of Titan
They both left their jobs in the spring of 2017 and set out to democratize wealth management. They didn’t know exactly how it would be done at first, so they spent six months building app prototypes and sending screenshots to their friends and family. It was during this time that they met their third co-founder, Max Bernardy, who had a degree in Computer Science from Stanford University and had also spent time building software for a hedge fund. Together, the team kept iterating on multiple app prototypes until ultimately landing on Titan.
Up until now, they’ve been operating as a team of three. Joe is more focused on the overall vision for the company and asking questions like why a product should exist, while Clay specializes in implementation and Max in software. They just hired their first non-founder engineer, and with the recent funds raised, they plan to make careful, strategic hires to enhance their video content offering and drive user growth through cost-effective strategies like search engine optimization.
A Hedge Fund is Only the Beginning
Titan has its eyes set on growth. Just last week, they announced an integration with financial management app, Personal Capital, so that the 1.9 million+ users, who use the app to keep track of all of their bank accounts, retirement plans, credit cards and investments in one place, can now also link to a Titan account. This could drive new users into Titan products, while it could also potentially incentivize clients to increase the size of their investments with Titan. And they’re planning more integrations, with Mint up next on the horizon.
“Our vision is not just to build a hedge fund for the masses, [it’s] to be the next BlackRock, managing a fleet of investment products, just one of which is this hedge fund product.”
– Clayton Gardner, Co-Founder of Titan
Clay discussed plans to expand not only into other hedge fund strategies, but also other products entirely, like fixed income, cryptocurrency and international equities. Every product decision they make begins with their mission: to make the elite investment experience available to everyone, which is why they are also laser-focused on enhancing the user experience through native video. The team has already experimented with a “one-to-many” video model, while Clay discussed the possibility of adding a feature akin to Instagram stories and even the ability to video chat directly with one’s wealth advisor. They recognize the challenges in scaling the latter as their client base grows, but it’s clear the Titan team is thinking carefully about how to grow this company while staying true to their mission. I’m excited to see where they take it from here.