“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”

Satisfying Demand

Derivatives could help satisfy investors’ demand for P2P assets, while also helping others hedge risks on loans they’ve already bought. The instruments could also bring more investors swooping into the market simply to place speculative wagers.

Brandon Dickinson, principal at Canaan Partners, a $4.2 billion asset firm based in New York and Menlo Park, California, is counting on the former.

“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in.

Derivatives Pioneer

Edman, who runs New York-based Synthetic Lending Marketplace, or SLMX, has some high-profile experience. In the early 2000s, he helped invent a kind of credit-default swap that enabled some Wall Street firms to bet against U.S. subprime mortgage bonds.

But Edman sees little resemblance between the boom-era mortgage market and the current peer-to-peer market. He said his derivatives will help investors hedge their bets and also improve the pricing of the underlying loans.

Indeed, Edman said the ability to short the loans could curb some of the enthusiasm for this asset class before any of the debt sours.

“If derivatives in mortgage-backed securities existed in 1998, we wouldn’t have gotten to the point that we did in terms of the bubble in mortgages,” Edman said. “This keeps a market honest.”

Investors are already showing some skepticism. Less than a year after going public, LendingClub is the sixth-most bet against stock on the New York Stock Exchange.