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Expert investment community SumZero coming soon to a hedge fund near you

I’m a big believer in expert investing communities and have written before about how these types of communities benefit investors.  The sites bring a certain liquidity of ideas into the marketplace benefiting professionals and individuals alike with their thoroughness and visibility.

To that end, I recently got a chance to shmooze with Divya Narenda, founder of SumZero, an interesting expert investment community servicing professional investors.  Divya’s got an impressive pedigree which reads Sowood, CSFB and Harvard.  He was also a co-founder of  Google that one.

SumZero is definitely not zero sum

To gain entrance to the exclusive SumZero club,  you must submit an investment thesis.  Once your membership has been approved, you’re able to submit more content to the community or read the almost 1100 entries already submitted.  There are nifty social media tools which allow you to submit questions to authors and rate their write ups.  It’s an unbelievable treasure-trove of information with detailed, catalyst-driven writeups on stocks, bonds, macro, and commodities.  See some examples of both long and short community-generated investment ideas.  More so, SumZero provides a platform for buyside analysts to reach out to one another to help vet and find investment ideas.

The next section is comprised of takeaways from the interview with SumZero’s Narenda:

Can you tell us about SumZero.  What was its genesis?

Divya Narenda, founder, SumZero: The SumZero concept dates back to April 2007 while I was working at hedge fund Sowood Capital. A friend of mine from college and I were brainstorming about potential business ideas and realized that no one had created a transparent platform for professional investors to share actionable investment ideas and also to network with one another. Put another way, the vision was to create a “Wikipedia-like” investment idea database structured within a social network dedicated to the buyside. When Sowood Capital sold its assets to Citadel in summer 2007, I decided to pursue building SumZero full-time instead of taking on another hedge fund job. Six months later, we launched a beta of SumZero in March 2008, bootstrapped with our personal savings.

How are analysts using it? Why are they using it?

Analysts are using the site to vet out existing investment ideas, generate new ideas, and also to build their professional networks. Some people have even been able to secure internships through SumZero. Each day there are new write-ups posted and new members in the community, providing incentive for existing members to log.

I’m concerned about incentives here: analysts talking up their book.  Are these perverse incentives or is that part of the game anyway?

DN: It’s fair to say that SumZero members can use the site to spread awareness on companies that they own. I personally do not see this as a bad thing, and many see this as an important signal of the conviction behind an idea. If you really think highly of an investment idea, it makes sense that you would take on a position (i.e. put your money where your mouth is). This is also a major differentiator between the research on SumZero, which is generated by buyside analysts, and other research available from the sell-side or through independent research shops. Sell-side and independent research analysts do not take the risk of putting on positions.

I label systems like you’ve developed as “expert investment communities”.  Does the system create a hierarchy of best writeups/best performers?  Are there implicit/explicit incentives built in the system?

DN: That’s a fair label. SumZero members who post ideas have the ability to rate individual ideas on a scale of 1 to 10 (10 being the highest). Also, because each member’s name is attached to his/her write-up, they are incentivized to post something compelling. Putting up a good write-up helps build a good reputation within the community and also helps a user improve his network (people are more likely to comment on a good idea versus a mediocre one). We will be improving the ratings system on the site over time to improve the level of feedback provided to each analyst.

Are there metrics that follow the stock pick post-writeup to see how well it did?

DN: Currently we do not measure the performance of each idea, but all ideas are time stamped and have an associated target price. A user can easily see where a security traded on the date of the post and compare the current price to the target listed in the write-up. Tracking performance is another obvious area of improvement for the site, which we hope to implement as we grow resources. It’d be great to automate this process eventually.

Does SumZero require disclosure?

DN: S umZero does not currently require disclosure of holdings, but members will sometimes voluntarily make disclosure statements within their write-ups.

How do hedge funds/investment funds handle analysts writing/sharing investment info.  Is this sanctioned or are most of these people kind of writing under the radar?

DN: This is tough to answer. Given how much SumZero has grown, there are clearly many in the hedge fund industry who see the value of collaboration with peers. On SumZero, accessing the idea database is free. The only cost is posting up an idea. So in exchange for putting up one write-up, an analyst gets access to what is now nearly 1,100 existing write-ups along with a pipeline of new ideas. This trade-off is quite powerful. Some analysts get approval from their PM’s before posting. Others don’t post, and simply use SumZero for its networking functionality. Hopefully, over time, SumZero will help overcome the customary reticence of many analysts within the industry.

You’re going to get your JD-MBA next fall at Northwestern.  What’s the next step for SumZero?  Where are you taking the platform?

DN: I’d like to continue growing SumZero, despite enrolling into Northwestern’s JD-MBA program. Without giving away too much, we’d like for SumZero to have top-tier analysts from all of the global financial markets covering as many companies as possible. We’d also like to diversify the content on SumZero while maintaining its quality. Hopefully, SumZero will eventually become a standard part of every analyst’s investment process.

Thanks, Divya.

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