Is social networking growing up, or should we get ready to “LOL” at the hedge fund industry?
Derwent Capital Markets, a family-owned hedge fund, will offer investors the chance to use Twitter posts to gauge the mood of the stock market.
Bloomberg reports that the Derwent Absolute Return Fund Ltd., set to start trading in February with an initial $39 million under management, will follow posts on the social-networking website. A trading model will highlight when the number of times words on Twitter such as “calm” rise above or below average.
Bloomberg notes a paper by the University of Manchester and Indiana University published in October said the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. A change in emotions expressed online would be followed between two and six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6% accuracy.
“Sentiment and mood dramatically change the impact of positive and negative news stories,” Paul Hawtin, the fund’s co-owner, told Bloomberg. “If the market’s in a very positive and bullish mood, it can shrug off bad news−bad news comes out and you expect the Dow to fall, and it doesn’t.”
Twitter now has 175 million users and sees 95 million posts per day, according to its website.That has risen from 50 million per day as of February, and researchers are finding new uses for this rapidly growing source of real-time data.
Their results showed that rises and falls in the number of instances of words related to a calm mood could be used to predict the same moves in the Dow’s closing price between two and six days later, with a fall in these “calm” words being followed by a fall in the index. The other moods did not have the same predictive quality, the paper said.
“The only risk for us is if Twitter falls away and people just don’t use it anymore,” Hawtin added. “But we believe that it can only get bigger and better, and that more and more people will be using it to express their feelings.”