Most hedge funds generally regard social media as a mixed blessing for getting the word out and drumming up business. But there’s another way to view the social media phenomenon. With the right tools, funds could better harvest the trading-related data from social media sites.
The idea of exploiting social media for investment purposes is gaining ground. The London-based Derwent Capital Markets launched a hedge fund in May, domiciled in the Cayman Islands, with a strategy based on “sentiment derived from real-time social media data analysis,” say fund officials. Derwent is touting the fund as the first of its kind for Europe. The portfolio is composed of liquid equities and equity indices and the fund manager will use the analysis of social media feeds to get insights into the “fear and greed” guiding the markets.
“For years, investors have widely accepted that financial markets are driven by fear and greed but we’ve never before had the technology or data to be able to quantify human emotion. This is the fourth dimension,” according to Paul Hawtin, founder and fund manager for Derwent.
While venturing into the fourth dimension may be a stretch for some, there’s likely to be a big push among hedge funds to explore “Twitter funds,” says Chris Grandi, founder of the private cloud and hosted IT services provider the Abacus Group.
“We do have people looking into taking data points from social media feeds,” Grandi says. The San Francisco-based Abacus targets it services to hedge funds and private equity funds. “I do think it’s real. I think the information in a lot of these feeds is somewhat valuable, and funds are going to figure out how they can get an edge by bringing this data in and processing it more effectively than someone else.”
On the IT side, the challenge for hedge funds will be getting the data into their systems. Funds will also have to sort out a tangle of regulatory implications. “A Tweet may go out to one million people—how do you control that message?” Grandi asks.
Hedge funds are likely to want social media information about public companies, their equity prices and any relevant rumblings about their performance, Grandi says. “How do we aggregate all of the disparate information that’s out in the social media market over Twitter?”
It’s early days for Twitter funds and much has to be clarified, Grandi says. One obvious pitfall is that consumer sentiment expressed via social media could drive up the price of a stock or an IPO when the fundamentals do not support the higher valuation.
Clearly there are practical benefits for hedge funds if they can leverage the useful information from social media websites in this way. But, it’s comforting that the key judgments will still rest with the portfolio manager who can resist following old school fear and greed even if it’s supported by 21st Century technology.
For a related blog entry check out Maureen Lowe’s post: Following Tweets Could Make You Rich, on the Bull Run: Where FinTech Talks
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