LAST week, Derwent Capital Markets launched the world’s first social-media-based hedge fund. The $40m fund will use Twitter to guide its investments, monitoring a selection of tweets to gauge market sentiment before making trades. Spread betters hearing this news will be pricking up their ears and thinking about how this could be applied to their trades.
The idea of using computer analysis to mine market data from a source to inform investment decisions is not a new idea. But this is the first time that Twitter has been used in this way. It is the result of research published last year by Johan Bollen, a professor of informatics at Indiana University. Bollen demonstrated how the social networking site could be used to gain a prediction of market sentiment. The paper, titled “Twitter mood predicts the stock market”, claims an 87 per cent accuracy rate at predicting the movements of the Dow.
Derwent Capital bought the exclusive rights for the use of the analytics program via a licensing agreement with Indiana University. The hedge fund has also hired Professor Bollen, along with co-author of the study Huina Mao, as consultants.
Time will tell how effective the fund is – at its launch, Derwent Capital said that it hopes for 15 to 20 per cent returns. But how useful is Twitter for spread betters?
According to Michael Hewson, Market Analyst at CMC Markets (@MichaelHewson) “from my point of view it gives an element of interaction between myself, CMC Markets and clients.” Regulations do not allow analysts such as Hewson to give financial advice via Twitter, but his regular tweets keep followers updated on market movements. “Twitter is certainly useful for traders. It raises peoples awareness of what is going on in the market place.”
David Jones, chief market strategist for IG Index (@DavidJones_IG) is also worth a follow, tweeting at a prodigious rate.
However, there is need for a word of caution – and before you carry on reading you may need to sit down and pour yourself a stiff drink – not everything on the internet is the gospel truth. Remember the Rapture predicted by erudite theologians on Twitter for the weekend? Indeed – we are still all here reading this newspaper.
One example of a reality spanner getting thrown into the works of ingenious trading algorithms is the possibility that tweets about actress Anne Hathaway affect the fortunes of rockstar fund-manager Warren Buffett’s Berkshire Hathaway. Similarly, in February wrong rumours abounded on Twitter of the sudden death of the Saudi king. On the back of this unfounded speculation, crude oil prices had a short term spike as investors feared disruption of oil production.
Twitter is undoubtedly a useful tool in any trader’s armoury as you search for all the market news you can get your hands on. But beware the risks of unsubstantiated tweets.