New Twitter-Based Hedge Fund Beats the Stock Market

nonprofiteer writes "Derwent Capital, a new hedge fund that makes trades and investments based on Twitter sentiment, beat the market — and other hedge funds — in its first full month of trading. From the Atlantic: 'Using an algorithm based on the social media mood that day, the hedge fund predicted the market to make the right trades. Sounds unbelievable that something cluttered with mundane musings and media links could have anything smart to say about the market. But it's working so far.' Blind luck?"

One month?

[Mabbo]

They did better than average for one month. I could buy a random subset of stocks, and still have a 50% chance of beating the average. Call me if they can maintain this for 12 months straight. Then maybe they can see some of my money.

Irrational Exuberance and Irrational Fears

[RobinEggs]

So by following Twitter trends he can make investments that beat other funds in the short run? Are we supposed to be even remotely surprised here?

Everyone knows the stock market responds faster to fear and to delusions of sudden prosperity than to hard data; that's a large part of its problem.

Detecting and exploiting those fears and delusions accurately is a good trick (and I'm sure it isn't easy, even with this method). But it doesn't make the man a genius by a long shot. Nor does it make him a useful investor: banking on the current "mood" means he's actually inflating the dangerous cycles of emotionally driven, short-term investment decisions rather than making any kind of long-term decisions.

I've been ripped before for criticizing short term trading, including HFT trading, but I still think the people who keep the market even remotely stable and the people who make the market useful for it's true purpose (giving corporations a bond market and investors a place for potentially stable returns) are long term investors who follow the data.

And following twitter isn't what I mean by data-driven decisions.

Re:Failsafe Investing

[Billly Gates]

That looks obsolete. First off Gold is overvalued now and it is time to sell. Treasuries are no longer AAA and for short term the Us can repay its debt, but there is risk the TEA party will hold it hostage and by 2020 the GDP to assets ratio will be too much and will cause the US to be insolvent. Too much risk if you are looking for a safe investment ot offset more risky ones.

I do not trust Wall Street and I am broke currently. If I had money I would avoid Wall Street altogether as they are driven by flash trading and people who trade before and after hours by looking at our transactions pending and setting the price before they go in and ripping us off.

I guess in this economic age I would only trust bonds, but the interest is crap. What a terrible time to invest.

Re:One whole month!

[greg1104]

I always liked the related scam for selling stock selection services. You e-mail a group of marks "stock XYZ will go higher in the next month!", breaking them into (say) 4 groups. The next month, you contact everyone who got a good recommendation the last time with "stock ABC will go higher in the next month!". Repeat a few layers deep. After 3 or 4 such calls, a fraction of the people you contacted have now gotten nothing but winning picks from you; them you try to sell your picking service to.