'Twitter' Hedge Fund Navigates Early Market Turmoil
London-based hedge fund Derwent Capital Markets, dubbed “The Twitter Fund” because it uses tweets to help it predict market activity, turned in positive returns in its first official month of trading.
The fund, known to its investors as the Derwent Absolute Return Fund, gained 1.57 percent net of fees in July, according to an investor letter obtained by CNBC—outperforming both the S&P (which lost more than 2 percent in July) and the broader hedge fundindustry, which was up 0.76 percent, according to data from Hedge Fund Research.
Run by Paul Hawtin, the fund (started with about £25 million, or about $40 million, in seed capital) uses data gathered from millions of daily tweets from the social networking site Twitter to help it gauge the collective mood of the market. The fund was founded based on Indiana University research, which showed that mood states mined from various tweets can collectively predict swings in the Dow Jones Industrials Average with near-90 percent accuracy.
“The Twitter algorithm was very very useful [in July]. Sentiment was extremely dominant in the markets, so to have that signal was a huge advantage,” Hawtin told CNBC in a phone interview.
Hawtin says the Twitter trading algorithm was notably successful in helping them time a short positionon London’s FTSE market, around the time when euro zone leaders came to terms on a massive rescue package for Greece.
But navigating August’s market turmoil could pose a major challenge for the firm and its sentiment-based strategy.
Hawtin notes that the Twitter algorithm may not be as effective when markets are driven by rumors and government intervention, telling CNBC that “any trading strategy executed in these markets must be done so with extreme caution."
Hawtin declined to comment on the fund’s performance for August thus far.
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