A group of hedge-fund managers are launching a multi-million dollar hedge fund next month, using Twitter as its market indicator to determine sentiment and to thereby make investment decisions.
This information came from a recent article on CNBC / Yahoo Finance which quoted Derwent Capital Markets – a London-based hedge fund – as saying it had successfully marketed the new venture, officially called the Derwent Absolute Return Fund, to high net-worth clients and had attracted over £25 million in investments.
The company is confident it can achieve returns of at least 15-20% per annum by analyzing information gathered from over 100 million tweets each day, which the firm brands as “The 4th Dimension.”
On the face of it, this may sound like a risky, or even crazy, venture – but is it?
Let’s face it, the concept of rational markets has been comprehensively debunked during the last few years of economic crisis, and the global growth in wealth came to a dramatic end largely through a change in general sentiment. We’ve also seen plenty of allegations – many apparently backed by evidence – of collusion between those in research and those in investment banking to pump stock prices of certain companies at various times. In fact, based on this and my own experience, it seems that relying on the “experts” to manage your investments is no greater guarantee of success than simply using a general market-tracking fund – and often provides worse returns.
Furthermore, most people agree that we won’t see real growth return this cycle until consumer confidence picks up. Isn’t that really just about general market sentiment?
So contrary to some of the views on this fund, I would argue that this is a smart bunch of people – what they’re doing is using current technology to gauge market sentiment and make investment decisions from there. Instead of listening to a small group of people to try to understand what “the man in the street” is saying, they’re tapping into the collective feelings of millions.
I see this as the start of a whole new way of tapping into societal collective wisdom and sentiment. What do you think?
- BUBBLE WATCH: New Hedge Fund Uses Twitter To Pick Stocks (businessinsider.com)
- Twitter, the hedge fund (theglobeandmail.com)