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We’re improving default diversification for custom automated strategies

On Mintos, we offer various ways to invest. This article offers some insights into the newest features to be added to our custom automated strategies. These strategies give investors extra control over various investment parameters, including the level of diversification. More about custom automated strategies.

Key takeaways

Default diversification (the outcome of investing using Mintos’s standard diversification settings) provides the most effective diversification to reduce concentration risk under the current market conditions, and within the criteria defined by the investor for this strategy.
We’re improving our default diversification algorithm to address situations where it might previously have taken longer to reach the strategy target.
Diversification across different entities under a lending company has also been improved.

Investors have 3 options when managing the diversification of their custom automated strategies across lending companies.

Default diversification
Set to equal
Manual diversification

Default diversification

This option is enabled by default, provided the investor hasn’t switched off the option to diversify across lending companies. The strategy will diversify investments across loans issued by the selected lending companies. The same maximum allocation will be set for all issuers. This will generally provide the most effective diversification to reduce concentration risk for investors, within the criteria set by the investor for this strategy and the current market situation.

Set to equal

All selected lending companies will be assigned the same maximum allocation.

Manual diversification

Investors can manually assign their desired maximum allocation for each selected lending company. For example, an investor can choose a 10% maximum distribution for one lending company, 20% for another company, and so on.

How diversification is executed

Custom automated strategies will invest funds based on the chosen level of diversification. It is important to note that the diversification percentage for each lending company – whether calculated by Mintos or set by the investor – acts as an allocation limit. This means that the strategy will never invest more than the indicated percentage.

There could be situations where the allocated percentage can’t be completely filled if there aren’t enough loans matching the investor’s criteria available. For example, the strategy might be set up to invest 5% of an investor’s funds in loans from a specific lending company, but only enough to fulfil 4% are available. In this scenario, the remaining 1% would stay uninvested, and the strategy might not reach its investment target.

To address scenarios where the investment target might not be reached due to a lack of loan supply, we improved the algorithm behind default diversification. From now on, default diversification will check whether the selected lending companies have had loans available for investing in the last 4 weeks, and whether or not other investors invested in them. If not, the level of diversification for the respective lending companies will be set to 0%.

The allocated percentage for each lending company will then be diversified even further across loans from different entities of the same lending company that match the investor’s criteria. This diversification is also proportional to loans available for investing in the last 4 weeks, and whether or not other investors invested in them.

The improved algorithm will be available from 18 Jan 2021 for all newly created custom automated strategies. Existing strategies will keep their current diversification settings. If you want to use the new algorithm for your existing strategy, edit your strategy and enable default diversification. This one-time step is required for each strategy you want to switch over to the updated algorithm, even if it used default diversification before.