Theupdown.com: How to materialize virtuality

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What happens when MySpace [website] meets Wall Street? An even better question: What would happen if you created an online social network with thousands of amateur investors, gave them $1 million each in virtual dollars and asked them to give their best stock tips?

Three Harvard University-trained entrepreneurs are hoping it will help them find the next Peter Lynch.

Harvard Business School students Michael Reich, Georg Ludviksson and Harvard College graduate Phuc Truong, are busy developing TheUpDown.com - a site that looks like Facebook running a hedge fund.

Its founders are hoping to turn it into a cash cow by enlisting the site’s users to provide financial advice and eventually use a kind of crowd wisdom to run a real fund.

Reich, who is taking the chief executive role of the company, said the idea is to create a democratic investment fund “where you have not one hedge manager making tons of money, but you have more people."

“And the best of them get to share in the fees," he added.

That’s right. TheUpDown plans to pass along the wealth by awarding the best investors on the site a cut of the fees it collects for actually managing clients’ money.

Right now, TheUpDown is in test mode and adding users through invitations, most of which are being extended to business schools where students run investment clubs. There about 350 members currently, Reich said.

Registered users create profiles much like the ones on MySpace or Facebook. Then they are given $1 million in virtual cash and asked to create a portfolio of real-life companies and stocks. Users can also write analysis pieces as they play the market.

Fellow cyber investors rank users’ performance and TheUpDown’s managers plan to compare the site’s rising stars to how professional fund managers are doing in the market.

We're not really looking for the short-term hotshots," Reich said. “We’re really looking for investors that outperform the market in the long-term."

As the company opens up to the general public in the coming months, Reich wants to solicit actual money from clients to run funds mainly managed on the advice of the site’s top investors. “If we find a way to really tap into their knowledge, then we believe we can be really successful," he said.

The company is being run out of a one-bedroom apartment that’s been turned into a makeshift office in Allston.

But TheUpDown has an angel investor - a Swiss Internet entrepreneur named Joachim Schoss. Schoss was co-founder of Scout24, a European online business described as part Craigslist and part eBay, which was bought by German company T-Online International for $221 million in 2003.

Schoss said he raised about $275,000 in a first round of funding for TheUpDown. And it will be Schoss’ money that is initially invested using the site’s system when it has gathered enough users to actually begin creating a fund, Reich said.

This, Reich said, will allow the company to test and prove its social networking approach to financial planning is solid over the next six months or so.

It likely won’t be an easy sell to potential clients, who are used to handing their hard-earned cash over to financial professionals with proven track records, some experts said.

“What I typically tell people is to invest in established funds," said Linda Homsey, chair of the Financial Planning Association of Massachusetts. “A lot of people jumped into hedge funds, but typically the hedge funds are not run by amateurs."

“I would think people would be leery," she added.

Schoss, however, thinks TheUpDown is onto something. “They will have quite advanced statistical methods to find out who are the succesful investors - not by luck but by systems," he said.

Reich doesn’t yet know what kind of fund TheUpDown will manage, whether it will be a hedge fund or a mutual fund. And there are regulatory hurdles to leap before the company can start trading in real dollars. Reich said he’s working with a securities lawyer.

The concept behind TheUpDown is novel and fitting in an era when sites like Wikipedia and fantasy football are hugely popular. But turning to a social network of amateur investors for stock picks is a true gamble.

Then again, the markets always are.