Derwent Capital Markets, a London-based investment firm, launched this week a hedge fund worth 40 million dollars, a fund that will use Twitter to guide the placement of investments.
The fund, first in the world which rely on social media, will monitor a selection of pages in real time, to “get the feelings” of the market, before handling money.
“For years, investors have been saying that financial markets are driven by fear and greed, but nobody has used the technology to quantify emotions”, says Paul Hawtin, founder of Derwent. He added that he opened a window to the world fears.
Hawtin did not specify how the system that he developed works. The logical question to ask is: if Twitter can predict the public mood and mood can predict market trends, can then Twitter deliver predictions about the evolution of stock market?
Researchers at Indiana University and University of Manchester have gathered tweets for certain keywords and have filtered them through an algorithm able to determine the mood of the market. And, amazingly, it worked: Dow Jones academics have predicted the developments in 2008 with an accuracy of 87%.
It should be noted however that the model does not apply to major and unexpected events: Twitter has missed, for example, in October 2008, the program to save the American banking system, an event that made the market grow.
The fund founder anticipates an annual yield of 15-20% for investors. “We tested the system for some time, and the results were remarkable”, Hawtin says. If Twitter will prove reliable, the company might decide to monitor other forms of social media like Facebook or Google Trends.