Most people use Twitter to follow news events or hear what friends and industry experts have to say about things, but did you know you can also use the social networking site to make money in the market?
A new hedge fund—Derwent Capital—bases its investment decisions on what people say on Twitter and, incredibly, the fund beat the S&P 500 in its first month of trading in July. The S&P 500 fell 2.2%, while the fund returned 1.85%.
According to the Financial Times, the company randomly looks at 10% of all Twitter posts and categorizes them into a range of moods, such as “alert” or “happy.” The firm’s technology then predicts which way stocks will go based on these moods; its research found that its system predicted market movements with 88% accuracy.
Paul Hawtin, founder of Derwent Capital, told the Financial Times last March that he was confident the strategy would work. “We watch to see how each of the different mood states changes in real time,” he says. “The biggest sentiment change is reflected in the market around two to four days later.” It’s the global nature of Twitter, he says, that makes it a good sentiment predictor.
In a press release, Hawtin said that while investors know financial markets are driven by fear and greed, the technology wasn’t around to quantify human emotion until now. “This is the 4th dimension,” he says.
It’s far too early to tell if the fund will continue to outperform the market, and it’ll be interesting to see how the recent market swings will test their theories, but it may not be long before people start posting pics of their rising bank-account statements instead of the food they had for dinner.