New Twitter-Based Hedge Fund Beats the Stock Market 209
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?"
Cool (Score:4, Funny)
Twitter may have finally found a way to make a profit!
Re: (Score:2)
Heh... It's certainly nothing worse than anything else the hedge funds do to try to "make a profit".
Re: (Score:2)
Re: (Score:2)
Re: (Score:2, Funny)
Re: (Score:2)
You can't make money on stocks now... the FTSE is about the same level as it was in the early 90's. No one seems to mention this - if you'd invested across the board, 20 years ago, all you'll have back is the dividends.
Money out of nothing doesn't work.... the reason pension funds etc are doing crap is because the markets aren't growing. Pension funds did invest across the board, and because there's no real inflation in their investment, they're in trouble.
In desperation, banks have been looking to new
One whole month! (Score:3, Insightful)
It beat the market for one whole month? Wow! That puts them in the same class as 50% of high-school finance students!
Show me the three year and I might start to be impressed. If it doesn't go broke in 10 years, then I might take it seriously. A random pick of stocks has a non-negligible chance of beating the market as a whole in a single month.
Re:One whole month! (Score:5, Informative)
Re:One whole month! (Score:4, Interesting)
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.
Re: (Score:2)
Re: (Score:2)
Someone has been watching too much Leverage :)
Re: (Score:2)
"Even a stopped clock tells the right time twice a day"
Re: (Score:2)
More than 50%. There's a study that shows a random stock picker will beat the average fund manager.
Re: (Score:3)
Re: (Score:3)
In other news: Werdent Capital, a new hedge fund that makes trades and investments based on Facebook sentiment didn't beat the market or make any headlines.
Re: (Score:3)
The fallacy at work here is what trading system developers call "curve fitting". If you're given a set of data and claim there's a correlation between two things in it, you can always fit a curve to predict one from the other with good accuracy if you work on it a while. Clear signs of curve fitting in play are "magic numbers"--constants like the "2 to 6 days" alluded to here, where the model doesn't work unless you get them right.
The fun thing about curve fitting is that you never know when it's going to
Beating the market isn't that difficult (Score:2)
You simply have to understand what money is. Most people don't understand and are deliberately misled by those who do, so that they can fleece them... You need a bag holder, the guy who buys at the top and sells at the bottom.
I've been beating the market for several years because I understand exactly what's going on, where as most people seem to view life as a series of completely random unconnected events and are therefore continually caught by surprise.
Re: (Score:2)
Glad I'm sitting on a bunch of gold bought in the 1990's at $400/oz. Made $3 million on paper from it this year. Not touching it though. It's not a rainy day - yet.
That's BS. Gold has increased by around 10% since Jan 2011. Your $3 million paper profit represents $30 million in gold. If you have enough to keep $30 million in gold, you probably don't have any rainy day worries to deal with and you most likely wouldn't be posting on slashdot to begin with.
Just throw darts (Score:3, Funny)
I think twitter will have the same effect as a monkey throwing darts...
http://www.automaticfinances.com/monkey-stock-picking/ [automaticfinances.com]
Re: (Score:2)
Re: (Score:2)
But the correlation is only useful if some attribute of twitter can be shown to lead the market.
And only if you can eliminate all random events from the world. eg. What if there's an earthquake tomorrow? The CEO is discovered having an affair? Some granny goes on TV saying her car accelerated suddenly...?
Re: (Score:2)
Re: (Score:3)
Re:Just throw darts (Score:4, Funny)
One month? (Score:4, Interesting)
Re: (Score:3)
I could buy a random subset of stocks, and still have a 50% chance of beating the average.
Heh, good luck with that! Actually, chances are lower because the increases in stock value are not homogeneous.
Re: (Score:2)
Re: (Score:2)
Illustration: There are 100 stocks. 1 goes way way up, like 100x. 99 go very slightly down. A random subset of 10 stocks does not have a 50% chance of beating the average, since there is not a 50% chance it will include the 1 that went up. (Yes, I know I'm agreeing with you.)
And what exactly are the odds of such an odd distribution? Rather small perhaps? Isn't it more likely that deviations from the average will be spread more evenly???
Re: (Score:2)
Actually no. Stocks often have a geometrical distribution, with a large group slightly below the average, and a few very high.
Re: (Score:2)
There are 100 stocks. 1 goes way down, to like 1%. 99 go very slightly up. A random subset of 10 stocks does not have a 50% chance of beating the average, since there is not a 50% chance it will include the 1 that went down. (Yes, I know I'm disagreeing with you.)
In concrete terms, you're suggesting that the distribution of stock changes is highly skewed, and claiming that it MUST be skewed in terms of a long tail of stocks going UP. You're going to have to justify that.
Re: (Score:2)
Yes, but there's also a chance that 1 goes way down, while 99 go slightly up. With no other information we'd have to conclude that there is an equal chance of either situation occurring, thus there would indeed be a 50% chance of beating the market with your random 10 stocks.
Re: (Score:2)
On the other hand, a random subset of 99 stocks have a VERY good chance of beating the market....
Re: (Score:2)
1 goes way way up, like 100x. 99 go very slightly down.
Hmm.. That's not the stock market i know. In the stock market i know...
In a given month, a stocks go up (some go up a lot, some barely at all), b stocks go down some go down a lot, and some barely at all), c stocks are delisted (removed entirely - lets just consider them bankrupt although there are other situations that can cause a symbol to stop trading that aren't so dire), and d stocks are newly listed.
A random selection of stocks is likely to do wor
Re: (Score:2)
Heh, good luck with that! Actually, chances are lower because the increases in stock value are not homogeneous.
Your reasoning is backward, if the increases were homogeneous, the chance of a random subset beating the market would be 0%. On the other hand, if the deviations from the average are randomly distributed the chance would be 50%, and this seems pretty likely.
Re: (Score:2)
Really? I thought it was much more likely that a few stocks will rise really high, while the rest fluctuate randomly, so, in order to beat the market, one would have to pick those few that "drive the economy".
Nice thought, the one about being homogeneous nullifying your chances :) .
Re: (Score:2)
Due to the Small minus Large premium, randomly choosing stocks has outperformed over the long term. See equal-weighted indexes as an example of this.
The details (Score:2)
I am reading that the average hedge fund made 0.76% during the month, while this particular fund made 1.85%. Woohoo...
One month is a ridiculously small amount of time to judge an investment strategy.
Re: (Score:2)
You really should look up the definition of Average. You're using the definition of Median not Average. Your definition of average only applies if the stock market results are normally distributed, or in another way equal number of winners and losers and anyone who watches the stock market knows that is rare otherwise it would go up and down. What they did was they managed to get a profit of 1.85% when the average went down by 2.2%.
A longer test would be nice but comparing them to the return rate for Jul
Re: (Score:2)
Re: (Score:2)
I misread..."New Twister-Based Hedge Fund Beats... (Score:2)
Now a Twister-Based Hedge Fund would be a lot more fun than a Twitter-Based one...
ttyl
Farrell
little rationality exist in short term market (Score:2)
It should come as no surprise that markets often function (esp on the short term) based on rumor, gossip, mood swings vice reacting to actual intrinsic value of a company or a sector. Hence focusing on a form of media that specializes in the superficial is likely a reasonable decision for someone wanting to play a short term game.
Limitless (Score:3)
Sounds like the theory from the movie "Limitless" put into practice.
Volatility (Score:2)
Re: (Score:2)
Maybe not luck (Score:2)
IANAE, but maybe in the current environment of uncertainty, there's more predictability in following the psychology and state of mind of investors than following the "fundamental" indicators. But it seems that also contributes partly to the problem where we see more and more mimicry, which leads to larger cascades of buying and selling, thus even more volatility and sense of uncertainty.
Irrational Exuberance and Irrational Fears (Score:5, Interesting)
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: (Score:2)
The problem is that without the people who are speculating and taking bets, you wouldn't have nearly as many people that could make serious investments in companies. People invest in companies (in the sense that you want them to) because they expect them to grow. This is all well and good until an investor decides that he's done investing in the company. Maybe he's less certain about the future growth of the company. Maybe he just needs to free up capital for something else. Whatever the reason, he nee
Re: (Score:2)
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.
Actually, it's just the opposite. To the extent that the "mood" is irrational, and does not reflect long-term value, the best way to profit is to invest against the mood, buying from those cashing out due to irrational fears and selling to those irrationally willing to pay a premium. This tends to dampen the cycles, not inflate them.
Simply copying irrational behaviors would tend to amplify the instability—but that wouldn't help them make a profit. The only way to profit, long-term, is to bring the pri
Failsafe Investing (Score:2)
Harry Browne wrote a book about investing called "Failsafe Investing". In he he makes a pretty good statement. You can't beat the market long term. Any investment you make based on past performance is not logical. He proposed a thought experiment. Take a room of 100 people. Ask them to individually pick heads or tails. Flip a coin 6 times. You will likely have at least one person that picked all 6 right. Are they psychic? Are they the best coin flip picker? Nope they were lucky. The same with investors that
Re: (Score:2)
There are managers who've become famous for "beating the market" simply because they rationally examine what other people refuse to see and leave a field once they realize the ratings are all shit or they realize that data-driven investing has yielded to emotional positive-feedback loops.
You don't beat the market with bold declarations about a coin flip, you beat it with cynicism and independent thought; few if any people can predict the economy or the performance of a particular
Re: (Score:2)
I kind of agree with you. In reality, nobody can predict the market. But in practice, you don't need to. It's pretty easy to see a downtrend in the broad market, and when that happens you move from equities into bonds. And then when the market begins to trend upwards again, you do the opposite.
All you really do is follow the trend, without making any risky moves, and you will always make money both when the market goes up, and when it goes down. It's not rocket science, but it does require moving money ever
Re: (Score:2)
You are forgetting the rebalancing. When gold goes up and stocks go down enough you sell gold to buy stocks. When it reverses you do the same. He recommends rebalancing when one goes more than 10% from 25%.
Re: (Score:2)
Actually he said re-balance "once a year", which means to me he just has an arbitrary day he re balances, which (if he did it today, for example), could turn out bad. He's not reacting to the market, he's just doing things "because."
Re: (Score:2)
Read again. He said re-balance once a year and if you are watching the market and there are some big swings check your portfolio to see if any go below 15% or above 35% or the total value. I check it once a month and it rarely requires re-balancing.
Re: (Score:2)
Re: (Score:2)
You can't beat the market long term.
Is like saying that playing poker is all luck. Yeah, luck plays a part in it, maybe even a big part, but it's still the same group of 20 top players that finds themselves at the final table at tournament after tournament. People like Warren Buffet didn't become ludicrously rich just because they got lucky.
Re: (Score:2)
There actually appears to be a huge factor of luck involved, bolstered by "the club". Make enough and then it doesn't matter what happens. You can loose it all when statistics catch up with you and other investors will throw enough money at you to keep you going.
For every Warren Buffet out there, there's a few thousand others just like him who weren't lucky enough to get the needed windfall to get started. That's not to say he isn't smart, he is. That's a prerequisite. Alas, it is necessary but not sufficie
Re: (Score:2)
Re: (Score:2)
Now It is possible to get better than market returns fairly consistently but it requires that one studies and analyzes the data for long term gains and not chase fads, or has a planner who's job it is to do that. Over the last 7 years I have had an average return clos
Re: (Score:2)
Let me elaborate the rebalancing. If any one gets below 15% or above 35% of your total holdings you sell and buy those categories to return to 25%. This allows you to automatically buy low and sell high.
Also as you put more money into your account you put it in the cash holdings.
I've been using this for about 10 years now. So I have been selling gold for the last few years as it climbed and took up more of the portfolio.
Also during the crash in 2008 bonds spiked and I had to sell some and buy stock to rebal
Re: (Score:2)
Since I've been using this I've averaged about an 8% per year return. You don't have to believe me run the numbers yourself they are all available.
I suspect it would be dependant on when you do that annual rebalance.
But yes that mix will have done well, a much better idea that trying to pick stocks. Very US centric though,
Re: (Score:2)
What a terrible time to invest.
I completely disagree, there are some fantastic sales going on right now! Don't look at it as the market losing value, look at it as stocks being offered at one hell of a discount. ;)
If you're looking for a reasonable return on investment and have any kind of debt you can just focus on paying that off instead. It's not a glamorous way to acquire extra money but you're guaranteed to "earn" (save) that amount of interest.
Re: (Score:2)
First off Gold is overvalued now and it is time to sell.
Based on the "this is something I pulled out of my anus" technique. Exactly where did gold start becoming overvalued? I've been hearing this since $1000. What if I had sold my gold then? Gold is not like other commodities. Yes there is speculation in gold but the price keeps it out of reach of the little guy. Also people tend to hoard it as a very long term investment. It's a safety net. It's not a means of making profit but rather a means of safeguarding capital. Because when the dollar is gone and the Eur
Re: (Score:2)
"Yes there is speculation in gold but the price keeps it out of reach of the little guy."
no it doesn't.. Just dont be a prima donna buying "futures" or putting money in it with an investor. Get your hands dirty and go BUY Gold. Over the past 2 years I bought at well under going prices a lot of gold that is 12K and 24K by hitting garage sales and flea markets. A lot more silver as well that way. I'm a ultra little guy, I have $0.00 in the stock market. I do have 30 pounds of High quality silver and 1
Re: (Score:2)
Oh from the fact it was $300 an ounce not too long ago and it goes up to $1600! Why? Buy low sell high is what I pulled out of my anus. The whole gold thing reminds me of real estate investment. I have seen it before and seen family members lose their life savings flipping houses when the bill comes due and the rates reset.
Once the recession recovers and people start buying stocks and bonds again the value of gold will plumbet. My father had a friend who in 1980 bought it and lost 80% of his money. Even if
Re: (Score:2)
While the GP method looks like sound, I am out of stock market too. FTC, obscene bonus for corrupt and incompetent boards,.... At least if I put it in a lottery I know what I am playing too.
Capitalists are trying hard to kill capitalism.
Re: (Score:2)
Actually with the bond yields falling my bond prices are rising nicely. The oldest ones I bought 4 years ago for $100 and mature in 2037 and are yielding 5%. They are at about $127.
Re: (Score:2)
Re: (Score:2)
Whoops sorry about that. I mean the coupon rate is 5% not the yield.
Re: (Score:3)
You might be interested in the lead, steel, and cordite portfolio if your tinfoil hat is on that tightly.
Regression Towards the Mean (Score:2)
The article didn't say HOW WELL it "beat the market" (that is, what percentage return), nor does it say how it did on a day-to-day basis. So I'm treating "beat the market in its first month" as a single data point.
We'll see how it does next month, and the month after that, and the month after that... [wikipedia.org]
Re: (Score:2)
From the source of the source...
[Twitter based trading] made 1.85 percent in its first month of trading, ending in July. This not only beat the S&P, which fell 2.2 percent that month, but it also beat out the average of other hedge funds, at 0.76 percent.
So it's pretty significant. It's all based on a paper which showed that there's a 5-8 day lag in the correlation between Twitter sentiment and stock price. If something is getting negative attention on Twitter, there is a nearly 90% chance that it's stock price will drop ~1 week later with a similar relationship for positive attention. I imagine people hear something on twitter, make an appointment with their financial adviser or make a note, then a few days later actually
One month isn't much ... (Score:2)
Sure, there's got to be some due diligence. One has to weed out the outfits with great product ideas but crappy business plans. But everything boils down to customers and market. Find happy
Sudden crash? (Score:4, Insightful)
Re: (Score:2)
Gaming the bot (Score:2)
now that we know... (Score:2)
and here goes your tweet-based prediction out of the window
Re: (Score:2)
..we can influence their predictions by coordinated postings of a large number of targeted "mood" tweets
and here goes your tweet-based prediction out of the window
Except you'll likely persuade lots of real traders that they've got to change their positions too, at which point you'll end up trampled by the stampede of mooing morons. That's the point when the rest of us will really laugh.
Rephrased. (Score:2)
"A change in emotions expressed online would be followed between two and six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6 percent accuracy"
Say What?:
- "A change in emotions expressed online" (50/50)
- "would be followed between two and six days later" (2-6 attempts)
- " by a move in the index" (50/50)
Rephrased:
- Flip 2 coins, you'll get the same face 87.6 percent of the time, if you keep trying up to 6 times.
I know i'm stepping into t
Re: (Score:2)
You'd be correct, except that longitudinal data is positively correlated. Checking the market six times is not equivalent to flipping a coin six times. Also, presumably by "move" they mean a move relative to the original price, not the last time they checked.
Of course Twitter is more powerful (Score:2)
The mathematical models need access to a large number of independent human minds to effectively control the level of uncertainty exhibited by the stock market. Formal (and hence finitary) mathematical methods just cannot cope properly and reliance on them is usually the cause of stock market bubbles and crashes.
Baynesian Search (Score:2)
I was reminded of Bayesian Inference [wikipedia.org], where experts make their best guesses along with probability limits. Twitter isn't exactly like that, but the stock market is driven by sentiment. People should buy low and sell high but they tend to buy high and sell low. ("Stocks are crashing! SELL! SELL SELL! Stocks are going up! BUY! BUY! BUY!") Measuring the mood of the crowd might be a good way to figure out the herd mentality and try to get some money out of it.
Not saying it works, but that's probably the theory
I'm going to ... (Score:2)
... tweet me a new minivan!
Not surprising (Score:2)
Insider Trading (Score:2)
Correlate the tweets with movements (Score:2)
Does it count as "insider" trading if the same information is available to everyone?
What would be interesting and extremely valuable (and open to manipulation, even by the tweeter if they became aware they were an indicator) is to come up with a "hot list" of people who's tweets had some sort of correlation with market movements. Whether you'd have to go further and demonstrate direct causality (maybe the CEO's children: we're going on a long cruise / no ski-ing holiday this year) would be an interesting
Re: (Score:2)
Mood-ring Market Analysis? (Score:2)
If an algorithm based on "mood swings", coupled to the utter crap that comes spewing out of Twitter 99% of the time, is being used to determine market investments, I don't know how that could speak any louder as to just exactly how ridiculous investment planning has gotten.
Oh, and all you Wall Street professionals, you might want to start looking for a new job. Sounds like you were just replaced with Twitter. Yeah, I know, I'm as shocked as you are, your new boss is a hash tag. Don't worry though, you ca
Not luck (Score:2)
While the market in the long-run does follow "Data", as a famous Economic Nobel Laureate said "in the long-run we're all dead".
The long-run is, of course, made up of lots and lots of short runs. On a time-scale of days/hours/minutes/seconds (even micro-seconds now) the market looks brownian, or fractal, or like noise. As any serious trader knows it is emotions not logic that drive it in the (very) short-run. (Excepting purely quantitative imbalance corrections, sorry I forget the term).
Consequently this
Not at all surprising (Score:2)
Silly (Score:2)
A change in emotions expressed online would be followed between two and six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6 percent accuracy
So they make a prediction and then wait for up to 6 days for the market to go the way they predicted, and they only ran it for a month. Seems like random fluctuation to me.
Beat the market (Score:2)
The market is stupid easy to beat, and there are lots of well established methods to beat it. One of the easy ways to do it is to buy a a distribution of index based mutual funds and bonds, and readjust every year to maintain that distribution.
That will not only beat the market, but also beat 90% of all the other mutual funds.
huh wha? (Score:2)
something cluttered with mundane musings and media links
You described the pyramid scheme that is the stock market. Were you trying to describe twitter? Oh. I see. The ARE the same thing. My bad.
Re: (Score:2)
Limitless
Re: (Score:3, Funny)
He knows the movie idea has limitless potential, but he just wants to know what the name of it was.
Re: (Score:2)
http://www.iamrogue.com/limitless/fullsite/index.html [iamrogue.com]
Re: (Score:2)
Thanks, though some really thought I was serious.
Re: (Score:2)
According to Benjamin Graham [Warren Buffet's proffesor] In the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. While short term supply and demand may be driven by public opinion, the long term trends tend to be determined by fundementals.
And for another note, o.k. - they beat the stock market - but at what level of statistical significance? In June the stock market fell by 1.67%. I don't have the internal variance of the S&P, but if they
Re: (Score:2)