London-based Derwent Capital Markets has launched its £25 million social media-based hedge fund, using Twitter to gauge market sentiment.
Founder Paul Hawtin will manage the Cayman Island-based fund which consists of liquid equities and equity indices, using real-time sentiment analysis to provide what it hopes will be an invaluable insight into the "fear and greed" aspect within the financial markets.
Hawetin decided to set up the fund after reading research published in October that found that analysing the content of daily Twitter feeds using two mood tracking tools enabled the team to predict with an 87.6% accuracy the daily ups and downs in the closing value of the Dow Jones Industrial Average.
The new fund has now inked a licensing agreement with the researchers to use their algorithm in the real world.
"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 4th dimension," says Hawtin.
The use of Twitter in trading is fast gaining credibility, with another academic study from Technical University of Munich economists recently finding that the sentiment of tweets is associated with abnormal stock returns. The academics are now using Twitter for a Web site that predicts stock price trends.
Meanwhile, a Japanese asset manager is apparently planning a fund that invests in Nikkei 225 futures based on analysis of blogs in the country. Using an algorithm designed by academic Yutaka Matsuo, the fund is said to have achieved returns of 7.5% from its launch in August to the beginning of April, smashing the Nikkei 225 Stock Average's 1.9%, says the Financial Times.