The end game for many social investing sites is to create their own investment management products that link member’s brokerage accounts to the trading data generated by the top portfolios on each site. Today, Covestor is the first major social investing site to launch a stock trading product. It is called Covestor Investment Management (CVIM).

Covestor had to become an SEC-registered investment adviser (like competitor kaChing did last December, although kaChing still has yet to launch an investment product). Covestor has seeded CVIM with ten of the top traders on its site, representing a variety of investment styles from growth to value to market timing. Most are amateurs, but there are a couple registered investment advisers and one accountant in there. You can see their portfolios on Covestor, but the ones they trade on CVIM are different and you get only an aggregate view of their returns and top holdings. Once you subscribe to them, you get a full detailed view.

What Covestor is actually selling is investment data. Each of the ten “portfolio managers” are trading for their own accounts. They never hold any of your money. CVIM merely links their trading data to a brokerage account you set up either with TD Ameritrade or Interactive Brokers. You select which accounts you want to follow, and CVIM automatically instructs the linked brokerage account to mimic the trades in proportional amounts. Covestor charges a management fee of about 1.5 percent of your assets being managed, or $12.50 per month (whichever is greater), which it splits with the investors being tracked. You also end up paying the fees for each trade to your brokerage (up to $17 per trade).

Covestor CEO Perry Blacher argues that at least you know exactly what you are paying and that this can turn out to be less than investing in a mutual or hedge fund:

With a mutual fund or hedge fund you absolutely pay per trade. It is another transparency issue. The mutual fund does pay commissions, they pay fees to the broker that sells stock to them it is just you don’t know how much commission they paid as it is reflected in your own performance. In other words they may have bought a stock at $11.25 but it will appear as if it were bought at $11.13. They wrap the commission into the cost of the security/securities.

In the end, nobody is going to care about the fees. It is the performance of each portfolio that matters. I’m not convinced that really good amateur investors can do any better than professional investors. Over time, they nearly all get beaten by the S&P 500. If you take a look at how each of the ten Covestor “model managers is doing, some are beating the S&P 500 this month, but none are beating it over the past three months. I’d definitely want to see some outperformance before I put any money behind these guys. But I like the fact that Covestor is leveling the playing field for smart investors to virtually manage funds and compete with the institutional establishment.

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Every social investing site wants to turn the insights of its trading members into financial products that people can actually link to their brokerage accounts. Finding the few brilliant stock pickers in the crowd and then letting everyone else follow their portfolios while taking a cut of the management fees is the business model. KaChing, which is the most popular investing application on Facebook (previously called FSX), just took a major step in that direction by becoming a registered investment adviser with the SEC. Sometime in the second half of next year, it will allow its members to link their brokerage accounts to the portfolios of the elite managers on the site and automatically follow their trades.

The company has raised an angel round from some heavy hitters in Silicon Valley, including Marc Andreessen, OpenTable CEO Jeff Jordan, Benchmark Capital partner Andy Rachleff, and Kleiner Perkins partner Kevin Compton. Bruce Dunlevie of Benchmark, Doug Mackenzie of Kleiner, and former Opsware CEO Ben Horowitz are also investors. (All the VCs invested individually). The size of the round was not disclosed.

Competing social investing sites such as Cake Financial (which launched at TechCrunch 40), Covestor, and PersonalRIA (which launched at TechCrunch 50) all have the same plan. All of these sites want to disrupt the current mutual fund industry by broadening the spectrum of potential money managers. PersonalRIA sticks with professional investment advisers, whereas Cake, Covestor, and kaChing each provide a platform for talented individual investors to attract a following.

In some respects, kaChing is the most extreme example of pure social investing. Cake and Covestor both track real trades in real portfolios, whereas anyone can create a fantasy portfolio on kaChing. There are absolutely no barriers to entry. CEO Dan Carroll argues this is a good thing because you could be a brilliant investor but not have the money to actually trade. KaChing levels the playing field.

The counter-argument is that following people who are investing real money is less risky because at least they have something at stake. It’s not just play money. The recent returns of most professional money managers, however, doesn’t necessarily bear that out.

Carroll says that risk is taken away by forcing everybody to be open about their investment strategies and showing their entire holdings and each trade as it happens. In other words, the data doesn’t lie. Carroll says:

A lot of the problem is there is no transparency. We are offering complete transparency.

Well, not complete transparency. He won’t say how much he raised from his angel investors, after all. But he does demand transparency from the investors who use his site. I guess that is what he meant. Carroll himself, by the way, has a pretty impressive stock-picking record. His portfolio is up 25 percent in the past six months, during a time when the S&P dropped 36 percent.

Some other members on the site have done even better. Richard Jones has an eye-popping 372 percent six-month return, while Nick Kwok has a 97.8 percent six-month return.

Who are these people? I have no idea. Richard Jones appears to be from the UK and uses a dog picture as his avatar. On the Internet everyone’s a dog, but would you invest your money with someone who actually presents himself as a dog? Carroll thinks it doesn’t matter. You can see his holdings and you can see his risk-adjusted returns. And the site gives you tools to evaluate whether or not Jones is good or just lucky.

Carroll has some ex-Google engineers (who doesn’t these days?) cranking out algorithms like the SuperCruncher, which comes up with a skill score for each investor by comparing the source of their returns with their stated investment strategy. If your strategy is to invest in large cap value stocks, but all of your returns are in small cap growth stocks, you might just be lucky. As it turns out Richard Jones’ skill score is 0%. Maybe he lets his dog pick his stocks.

Nick Kwok, in contrast, has a skill score of 100%. So at least he is accomplishing what he has set out to do, which is to make money by investing in financials and large caps. But his research score is low. (Each investor is encouraged to write out the reasons for each trade, and the research score is determined by how many other members indicting that they agree, disagree or think it is worthless).

Of the 350,000 portfolios on kaChing, 20,000 (1,500 of which are diversified portfolios) have actually generated positive returns over the past seven months, which is no mean feat. The idea that a tiny percentage of kaChing’s members can beat the market is really appealing, and I hope that Carroll is right. But we need more data. How many of those 20,000 can stay in positive territory, or even just beat the market?

It is quite possible the leaders will keep switching out, making it very difficult to invest in a winner over the long run. The iron law of investing is that, over time, everyone’s performance returns to the mean, or worse. Why should a bunch of investors on Facebook prove any different?

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Covestor, a social investing site where people share the performance of their real stock portfolios, came out of private beta this morning. Now anyone can join, and it is welcoming voyeurs who only want to watch other’s performance but not share their own. This should broaden the appeal of the site and provide a no-commitment entry point for people who may be uncomfortable with sharing their personal financial data on the Web (i.e., most of the population). President and co-founder Perry Blacher explains the company’s approach:

It was always in our plans. We had a Catch 22 up front where we had to create liquidity of leaders and so couldn’t start off by saying “Come and track the best investors you have never heard of,” because there would have been no one in the room.

We decided to start off by creating a high-barrier-to-entry community where you had to share to participate to build the base. The long term objective is really about building a mass follower proposition for the world’s best self-directed investors and to enable others to invest directly alongside them (de-insitutionalizing fund management) and that requires it all to be open and public.

You would be amazed by people’s willingness to share and the quality of the guys out there. For example, our average member’s portfolio size is greater than $200,000 in securities alone (excluding cash).

Blacher won’t say how many members signed up for the private beta or the total amount of investments the site is tracking. (Competitor Cake Financial is already well over $1 billion). But he does claim that the site’s members include more than ten times as many money managers than work for any professional investment firm (presumably tracking their personal portfolios) and people from more than 50 countries invested in more than 10,000 different stocks. He also estimates that ten percent of all stock bloggers have Covestor portfolios and says that the top 10 most followed investors have averaged a 123.5 percent return so far this year.

Other enhancements to the site include the ability to sort through members by investment goals or most recently viewed. And you can now import your contact list to make it easier to invite people to the site. The company raised $6.5 million last April from Union Square Ventures and Spark Capital. In addition to Cake Financial, it competes with SocialPicks, Vestopia, and Motley FoolCAPS.

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Brokerage, IRA, 401k and 529 assets can be managed. For now, only student loan accounts and mortgages are left off, although support for those types of accounts is coming soon. The site will show all your buys, sells, dividend distributions, etc. across multiple accounts. Dive into a single account or equity for its individual performance. Account performance v. the S&P and other indexes is graphed, and account charges are also shown.

There are some things you still won’t be able to do with Mint, such as stock trades, bill payments and funds transfers. Mint CEO Aaron Patzer says those features will eventually be added, with a focus on bill payments first. Funds transfers and stock trades are a little stickier, though, and may eventually require state and/or federal regulation of the company.

Investments will soft launch on May 6 for very active Mint users and roll out from there. Anyone who wants to be in the beta right at launch (whether they are a current Mint user or not) can sign up at mint.com/techcrunch and will be added on May 6.

Other services, including Cake Financial (another TechCrunch40 startup) Vestopia, Covestor, and UpDown also offer investment tracking.

We’ve been tracking Mint since their launch at TechCrunch40 last year. The 20-person company has now raised $17 million in venture capital and has 230,000 registered users (40% of which are active, Patzer says). 10,000 new users sign up each week (13,000 last week)

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There have been a lot of startups focused on enhancing your online personal finance, mostly around analyzing your investments (Cake, Zecco, Covestor) or expenditures (Mint, Wesabe). By contrast, Billeo functions as a straight forward tool for automating or remembering to pay your bills online.

You tell Billeo what bills you want to pay automatically or be reminded to pay and their service sends reminders and tracks you payment history online. Although a lot of banks offer online bill payment to third parties, Billeo also tracks your payment stats and compares them to the crowd. If you download the toolbar we previously covered, Billeo will also automatically fill out a lot of financial forms for you online. However, while other financial management tools haven’t incorporated online bill payment, it seems a clear feature addition that will compete with Billeo in the future.

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It takes guts to bear your investing acumen (or lack thereof) to the world. For instance, here is VC Fred Wilson’s Covestor page (down 1.47 percent since he joined about a week ago—Fred, get out of oil and precious metals already!). You can even put a Covestor widget on your blog to further gain a following.

The idea is that eventually, the best investors will emerge, and Covestor plans on creating ways to invest in their “funds.” They are actually just going to be selling the data and linking it to the brokerage accounts of people who choose to be followers. The investing stars who arise from this social soup will be able to offer their trading data for a fee once they build a track record or give it away for free and enjoy the notoriety of being an investing whiz. Covestor will take its cut as a management fee. The New York City startup has raised angel money from the founders of Seekingalpha, Betfair, Tribe.net, and Wallstrip.

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