Starting in February, a group of very bold hedge fund managers are launching a multi-million dollar hedge fund whose strategy relies on one very unusual market indicator: your Twitter account.
London-based hedge fund Derwent Capital Markets said it had successfully marketed a new venture to a series of high-net worth clients that makes investment choices using information gathered from over 100 million daily tweets.
Simply put: the fund mines the Twitter-verse to gauge market sentiment, and that information—which the firm futuristically brands as “The 4th Dimension” is used to drive the portfolio’s holdings.
The ‘Twitter Fund’, officially marketed to clients as the Derwent Absolute Return Fund, has already attracted at least £25 million in investments, according to the fund’s manager Paul Hawtin—who is also the firm’s founder. And it is currently in discussions to hire John Bollen, an Indiana University professor who has championed academic theories linking market performance to Twitter moods.
In all, it’s a bold strategy, with even bolder profit expectations.
Hawtin is confident he can achieve annual returns of 15-20 percent for the fund. But he hopes that’s just the beginning. “I believe with the Twitter indicator (once fully optimized) we can achieve even better annual returns,” he said in an emailed statement.
But even if the fund doesn’t return a dime on its money, it may have already made history. Hawtin believes the Derwent Absolute Return Fund is the first ever “to use real time mood analysis as a major part of the investment decision process.”
An informal search of publicly available hedge fund strategies seems to confirm that.
Asking investors to park millions in an investment vehicle that relies on the random musings of 190-plus million Twitter accounts was not without its challenges.
Hawtin says that investors were initially worried that the fund was simply going long or short based on its Twitter analysis. However, he says it’s a more nuanced process than that. “Once they understand it's a far more sophisticated system they then realize the potential,” he said.
Whether or not the fund can return on its lofty profit promises remains to be seen, but whatever the fund's future may be, it is sure to open the door for a new round of quantitative experimentation—as the investment world looks for new ways to profit from the endlessly vast amount of information streaming to blogs, Facebook, Twitter, and other social networking sites every second of every day.
Welcome to the 4th dimension.