In one of the stranger manifestations of social media mania, a fund is being created that will invest based on computer-programmed analysis of the social stream.
Andrew Graham, a media strategist who specializes in finance, energy, and public policy, says in a post on Mashable that London-based Derwent Capital Markets is planning to launch a “Twitter hedge fund” and has raised an estimated $100 million in capital.
Graham suggests the Twitter stream will be analyzed by computers that use some sort of algorithm to determine investment sentiment, but he is short on details about how this would work generate buy and sell signals of securities. An article on Bloomberg last December, however, provides more detail on the strategy.
Bloomberg reported that a paper, entitled Twitter Mood Predicts The Stock Market," by professors from the University of Manchester and Indiana University and published in October 2010 said the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. Derwent has teamed up with one of the authors of that research paper.
"Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds
are correlated to the value of the Dow Jones Industrial Average (DJIA) over time," says the paper. "Our results indicate that the
accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others.
We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction
of the Mean Average Percentage Error by more than 6%."
Could you imagine a fund manager using tweets to make investment decisions? Is this a sign of a top in the use of social media?