Hedge Fund To Use Twitter To Predict Markets

The Grackle of the Econocalypse

We reported back in October that an academic research report had concluded that by analysing Twitter, it could predict the closing price of the Dow Jones index with pretty impressive accuracy.

Well now a new hedge fund from a London-based company is going to test out this research with real money. The £25m Caymen Island-based Derwent Absolute Return Fund from Derwent Capital Markets will launch in February 2011, and Derwent have employed one of the researchers from the report to help them develop the model for their fund.

The research analysed millions of Tweets from users worldwide and then looked at how the stockmarket performed on that day. The greatest correlation between Twitter sentiment and stockmarket movement came from the “Google-Profile of Mood States” calmness index – accurate a remarkable 87.6% of the time.

TheNextWeb provides a simpler explanation:

The idea is that social media data can be used to help understand something that investors have never been able to tap into in the past – human emotion. The academic study measured the overall levels of calm and anxious language across the Twittersphere and found that a number of days after a calm period, the Dow Jones index would rise, with the reverse happening following a period of anxiety on Twitter.

It will be interesting to see how the fund performs when it launches next year, we’ll definitely be keeping an eye on it. I’m not sure I’ll be investing any money at the beginning though.

Creative Commons License photo credit: Ben Brown

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