Remember that Twitter powered hedge fund we told you about? Well, that fund by Derwent Capital just finished its first month, and apparently, it managed to beat the market during that period, according to a report by eFinancialNews.
At the end of July, the Twitter powered hedge fund, which uses sentiment analysis on the data extracted from tweets, returned 1.85% in its first month, compared to the S&P 500 which fell 2.2%. Average hedge fund returns in that period were 0.76%.
When it was first launched in December 2010, many believed that it was just a gimmick. But then it raised £25 million, which told everyone that they were serious.
It works by analyzing tweets at random, at categorizing them in different moods like “happy”, “sad” etc. After performing analysis on almost 10% of the available tweets, the technology powering the fund makes predictions about the direction of the market. The initial research shows that the algorithm has been able to predict the movements with almost 88% accuracy.
Looks like everyone has been able to find a way to make money off Twitter and its data, except Twitter itself.
I wouldn’t be surprised if some more social media powered hedge funds launch in the coming months. After all, it does seem to be working.
Reports that a London based investment firm was planning to launch a hedge fund whose investment strategies would be driven by tweets on Twitter first surfaced in December 2010, after a computer scientist from Indiana Bloomington published his research that proved that by analysing tweets, one could roughly predict stock market movements.
Well, that Twitter powered hedge fund, launched by Derwent Capital Markets, just raised £25 million from investors and will begin trading soon. It is the first social media based hedge fund which will use “sentiment derived from real-time social media data analysis”.
The ‘Twitter fund‘ will manage a portfolio of equities and indices with the aim of achieving consistent absolute returns for investors. The fund manager hopes that the data generated will be an invaluable insight into the fear and greedaspect within the financial markets. It will focus on the FTSE100, Dow Jones and S&P500 using algorithmic trading systems coupled with sentiment analysis.
This is just the first of many, a couple of new hedge funds have already been announced, which will use similar sentiment and emotion analysis techniques derived from social media feeds. Historical analysis has shown that sentiment analysis of tweets has been quite accurate in predicting the movement of the broader market indices.
So what’s next? Hedge funds which invest based on Facebook updates? Or funds which predict the movement of a stock based on the company’s attrition rate derived from LinkedIn data? Or one which predicts agri-commodity prices based on how often you tend to your crops on Farmville? :P