This week, Derwent Capital Markets, a London investment firm, launched a $40 million hedge fund that will use Twitter to guide its investments. The world's first social media-based hedge fund will monitor a selection of tweets in real-time to feel out market sentiment before placing its bets.
"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," Paul Hawtin, the founder of Derwent Capital Markets, wrote The Atlantic in an email. With Twitter, he added, investors finally had a window to the world's fear.
Why would experienced investors cede their expertise to something as crude as Twitter for guiding tens of millions of dollars in bets? Hawtin won't share how his algorithm works. But a team of professors from both sides of the pond have already answered that question for us.
HOW TWITTER PREDICTS THE STOCK MARKET
If Twitter can predict the public's mood, and the public's mood can predict the stock market, can Twitter predict the stock market?
That's the question researchers at Indiana University and the University of Manchester asked when they set out to measure Twitter's forecast of stock fluctuations. The professors harvested tweets for key words and plugged them into an algorithm to determine the mood of the broader market. Using this mood index, the professors predicted the Dow's daily fluctuations in 2008 with an astounding 87 percent accuracy.