(Bloomberg) — Brevan Howard Asset Management, the $16 billion hedge fund, and quantitative trading group DRW Holdings are buying a minority stake in fintech firm Edge Focus Partners in a bet that consumer lending will continue to expand beyond banks.
As part of the transaction, Edge Focus, whose models use machine learning to predict credit-default risk, will run a fund for Brevan Howard that will purchase short- and medium-term loans from lending platforms and other financial institutions.
“Our experience, relationships and technology have allowed us to curate portfolios that have attracted interest from institutional investors looking for new uncorrelated strategies,” Edge Focus Chief Operating Officer Hirak Biswas said in an emailed statement.
Edge Focus currently runs a fund that targets returns of about 20%.
The New York-based firm’s models assess thousands of pieces of data to choose loans most likely to be repaid. Rejection rates at online lenders currently run as high as 95%, and Edge Focus says its models will help these platforms expand the number of people approved for loans, allowing borrowers to get credit for less.
“We are very impressed with the team’s differentiated tech-enabled approach and are delighted to partner with Edge Focus to expand credit to mainstream U.S. consumers,” said Renaud Laplanche, chief executive officer of Upgrade, a platform that recently started working with the firm.
Edge Focus plans to expand its business outside the U.S. and branch out into other areas including real estate, auto and small-business lending, Edge Focus CEO Elliott Lorenz said in the statement. It eventually may offer bespoke funds for investors whose mandates include providing credit to under-served communities.
Edge Focus, a minority-owned firm, said its models assess credit risk exclusive of race, gender or other personal identifiable information. It screens its business partners to ensure they adhere to high environmental, social and governance standards and are willing to work with borrowers if they should run into financial trouble.