Does twitter make the difference for hedge funds?

The systematic and quant fund space is become ever more popular. With the success of CTAs in the 2007/2008 crisis, and their role as diversifiers confirmed in investor consciousness, a once niche area has now become mainstream. While this acceptance is of course good news for quants and CTAs, it leaves a new question hanging – when systematic strategies are often so similar, how can funds differentiate themselves from each other?

The answer could be found in social media mining. Information sources such as twitter provide a completely new source of information which has the potential to predict market moves and flag up developments before traditional media outlets have even noticed them, let alone published their guidance. The premise is that market behaviour is typically driven by non-rational human characteristics, and if you believe this theory, then individual and company tweets and the like a day make an all-seeing window into the market.

Recent research by Johan Bollena, Huina Maoa,(of Indiana University) and Xiaojun Zengb (University of Manchester) has shown that the public mood, as expressed in social media, provides “an accuracy of 86.7% in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average”.

This seems to be catching on. Derwent Capital launched a “twitter fund” in 2011, and initial results were certainly positive (although more recent results are unavailable), and interest in this sector is increasing, with unverified reports of other funds using this analysis alongside their existing methodologies

So, with the wealth of information available via social media data mining, can anybody make money from tweet analysis? Well, unfortunately not. There are usually over 250m tweets a day, and systematically sorting through them is no easy task – it takes dedicated software and expert analysis to event consider this. But signs are that, as social media continues to develop, this will become an important weapon for hedge funds to deliver alpha not beta for their investors.