Social trading platforms do not lead to higher returns for investors. Even when following just the most popular or widely followed strategies, investors lose money.

This finding is based on an analysis of two German social trading platforms, Wikifolio and Ayondo. Both platforms allow investors not only to follow specific strategies but also to directly invest in the portfolios of other users through brokerage accounts linked directly to the respective platforms. The two platforms offer information about the performance of the various users, their respective popularity, risk measures and other related information.

The analysis of the platforms first tested a simple (“naïve”) approach of simply using the portfolios with the best displayed overall performance since their publication. Each month, the approach was adjusted to follow the updated list of top-performing strategies. Using this approach on Ayondo would have resulted in a 36-month cumulative loss of 92%. On Wikifolio, this strategy would have resulted in a 29-month loss of nearly 79%. (The time periods are different due to variations between the two platforms.)

A more sophisticated approach of factoring in risk when analyzing returns fared better, but still resulted in big losses. On Ayondo, an investor would have lost 36%; on Wikifolio, they would have lost 13%.

In terms of popularity, no significant relation was found between the number of followers a trader had and the return one week later for Ayondo. For Wikifolio, changes in the amount of weekly dollars allocated to a strategy had no significant association with returns. “We cannot find clear evidence in favor of a wisdom-of-the-crowd effect regarding an identification of superior traders on either of the two social trading platforms,” wrote the study’s authors.

Transaction costs were problematic for both platforms, particularly for Ayondo where trading activity was higher. “Frequent shifts in the portfolio” were blamed for reducing returns.

The study period was limited to two trading platforms during the period of 2013 through 2016. Social trading platforms are relatively new overall. The limited amount of research that has been published about them has found returns to be negative or at least not associated with outperformance.

Source: “To Follow or Not to Follow – An Empirical Analysis of the Returns of Actors on Social Trading Platforms,” by Gregor Dorfleitner, Lukas Fischer, Carina Lung, Philipp Willmertinger, Nico Stang and Natalie Dietrich; The Quarterly Review of Economics and Finance, 2018.

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