by Atholl Simpson at http://www.citywire.co.uk
Millions of people share information every day using the social networking site Twitter and although a large amount of it is useless – such as footballers tweeting about the contents of their breakfast bowls – there are some nuggets of information which investment professionals can find useful.
Leading market commentators Barry Ritholtz and Nouriel Roubini, for example, are part of the ‘twitterati’ and avidly tweet interesting market views they find as well as their own opinions on financial events.
With such a wealth of information available at the touch of a button, can investors can harness this massive amount of data to their benefit?
London hedge fund founder Paul Hawtin of Derwent Capital thinks so; he intends to use Twitter as a key investment tool in his upcoming hedge fund venture.
He launched his company two years ago with his brother Simon, and after trading for private accounts the pair decided to launch their first hedge fund at the start of April, using Twitter and other networking sites to enhance their investment acumen.
‘I see this as the fourth dimension,’ said Hawtin, who also intends to use Facebook and MySpace to a lesser degree. ‘People have always understood the importance of information and what drives sentiment,’ he told Citywire, adding that gleaning concrete data on sentiment is an invaluable asset.
‘If you can do this it gives you a massive edge on the market as you know the mood.’
While the thought of using a social networking site like Twitter to make major investment decisions may seem far-fetched, Hawtin says there is method behind the madness and proof of its viability.
He came across the idea in October while browsing the networking site when he read an article which mentioned that Twitter could predict stock market movements.
‘It was a link to an academic paper. I was really fascinated by it and was also astounded by the results they were getting,’ he recalls.
The paper was written by US-based professor Johan Bollen of the University of Indiana who found that Twitter could predict the movements of the Dow Jones Industrial Average Index with an accuracy of 87%.
The results showed there was a lag of around three days between the mood results from Twitter and the rise or fall of the index, giving investors a precious window of opportunity.
The principle lies in analysing the 120 million tweets which are posted daily by the 180 million-strong twitter members and looking for mood states. Using an algorithm which works in real time it divides the information in to six mood states – anxious, calm, and sad for example – giving them an overall reflection of how the world is feeling.
‘You can feel market emotions and moods but to convert that into something tangible, into a signal, is another thing. That’s now what we’ve got,’ said Hawtin.
Bollen is now working alongside the Hawtin brothers as a consultant in their fund venture and they intend to use the information to invest in highly liquid assets, such as near-dated futures contracts on the S&P 500, the Dow Jones, the FTSE and very liquid large market cap companies.
According to Hawtin, the hedge fund is aimed at sophisticated high net worth individuals, funds of funds, family offices and small corporates.