Twitter hedge fund beats market
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August 17th, 2011
02:00 PM ET

Twitter hedge fund beats market

Editor's Note: The following text is from GlobalPost, which provides excellent coverage of world news – importantmoving and just odd. 

A new hedge fund that uses Twitter to determine its trading strategy outperformed the Standard & Poor's 500 Index and the average hedge fund in its first month of trading.

Financial News called the news "the first sign that social media data can be used successfully to enhance electronic trading techniques."

London-based Derwent Capital, which bills itself as "Europe's first social media-based Hedge Fund," returned 1.85% in July, according to Financial News. The S&P 500 fell 2.2% during that time, while the average hedge fund made 0.76%.

From Financial News:

"The fund, which declined to comment, uses sentiment data mined from millions of Twitter messages, or ‘tweets’, to predict market movements. The strategy is based on research published by the University of Manchester and Indiana University in October which demonstrated that the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average."

Derwent scans 10% of available tweets at random and then sorts them into moods by focusing on words like "alert," "vital" or 'happy." That data is then used to predict market movement. The initial research, Financial News reports, predicted movement in liquid stocks with 88% accuracy.

“The Twitter algorithm was very very useful [in July]. Sentiment was extremely dominant in the markets, so to have that signal was a huge advantage,” Paul Hawtin, Derwent's founder and fund manager, told CNBC on Friday.

According to a press release put out by Derwent in May, real-time "sentiment analysis" provides what the fund "hopes will be an invaluable insight into the 'fear and greed' aspect within the financial markets."

“For years investors have widely accepted that financial markets are driven by fear and greed but we’ve never before had the technology or data to be able to quantify human emotion," Hawtin said at the time. "This is the 4th dimension."

For more, visit GlobalPost.

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Topics: Economy • Internet

soundoff (4 Responses)
  1. Matthias Knab

    I met with the Twitter hedge fund founder Paul Hawtin early July this year in his office in London, just one week after he went live.

    You will hear him talk about interesting details like:

    – How the Twitter hedge funds's signals are computed

    – Operational set up and infrastructure of Derwent

    – Trade generation

    – The "Michael Jackson" Test: Is the Twitter hedge fund an automated black box?

    – Risk Management

    – Will large scale analysis of social media be part of quant trading and investing from now on?

    – Who is invested in the Twitter hedge fund?

    – Capacity, Target return

    August 18, 2011 at 2:21 pm | Reply

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