Derwent Capital, the hedge fund that is using Twitter sentiment to make its investments, beat the market – and other hedge funds – in its first full month of trading. Could this be the beginning of a social media investment trend?
The hedge fund was announced back in December 2010 as a way of harnessing social sentiment to predict the stock market. It invests based on a randomly selected portion of all tweets on Twitter, analyzing them for sentiment.
The basis for Twitter sentiment as a predictor of the stock market is an academic paper published last year which found that certain emotive words in tweets – even those not directly related to the financial industry – signaled a rise or a fall in the stock market.
The hedge fund was delayed for a few months shortly after it was announced, due to an overwhelming demand to participate. And it looks like those who were scrambling to get in on the ground floor will be laughing all the way to the bank today.
eFinancialNews reports that by using a Twitter-based strategy, Derwent Capital returned 1.85 percent in its first month of trading, ending in July. This not only beat the S&P, which fell 2.2 percent that month, but it also beat out the average of other hedge funds, at 0.76 percent.
It looks like tracking Twitter sentiment proved profitable for this fund. And considering the amount of attention it’s received in the media, I wouldn’t be surprised if others got on board and started using Twitter to inform their investments as well.