Twitter-Based Hedge Fund Claiming 87.6% Accuracy Set To Launch

Dec 23 2010 | 10:13am ET

Who needs expert networks when you’ve got Twitter?

London-based Derwent Capital Markets says the social-networking system is better at gauging market sentiment than just about anything else. In particular, use of “calm” motional words on Twitter, properly analyzed, lets the firm predict where the Dow Jones Industrial Average is going in the next two to six days with a remarkable 87.6% accuracy.

What to do with this nearly perfect knowledge—without a hint of insider-trading possible, given the public nature of Twitter? Why, launch a hedge fund, of course.

Derwent’s Absolute Return Fund will debut in February with £25 million. The firm has engaged a University of Manchester computer science professor to build the trading models. That professor, Xioa-Jun Zeng, worked on a paper published in October about using Twitter to predict movements in the Dow.

The hedge fund is in talks with the other two authors, Indiana University’s Johan Bollen and Huina Mao, about coming on board.

“Sentiment and mood dramatically change the impact of positive and negative new stories,” Derwent’s Paul Hawtin told Bloomberg News. “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.”

Derwint doesn’t plan to limit itself to the 30 stocks in the Dow or the index as a whole. It will also trade the FTSE 100 and FTSE 250 indices, oil, gold and other precious metals and currencies.

Despite the purported 87.6% accuracy, Hawtin said the hedge fund will target relatively modest returns of between 15% and 20% annually.

“The only risk for us is if Twitter falls away and people just don’t use it anymore,” he told Bloomberg. But with the social network’s daily post rate nearly doubling since February, Hawtin said he is confident “that it can only get bigger and better, and that more and more people will be using it to express their feelings.”


In Depth

Q&A: Neil Azous Talks Global Macro Investing

Nov 24 2014 | 12:41pm ET

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm...

Lifestyle

Scene Last Night: Clinton, Schwarzman, Corzine, Neidich, Diamond

Nov 25 2014 | 5:52pm ET

Steve Schwarzman had a granddaughter yesterday morning. Last night he sat one table...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.