Hedge Fund Bets $40 Million That Twitter Can Predict The Stock Market

Last October, Johan Bollen and Huina Mao, professors of informatics and computing at Indiana University-Bloomington, caused a stir in the business world when they said Twitter could be used to predict the Dow Jones.

Paul Hawtin, a 28-year-old hedge fund manager, liked the idea so much that he's now dedicating an entire hedge fund to it.

The original paper, entitled "Twitter mood predicts the stock market," investigated whether "collective mood states derived from large-scale Twitter feeds" like OpinionFinder and Google-Profile of Mood States correlated with the value of the Dow Jones Industrial Average. What they found was that their algorithm not only paralleled market changes, it predicted them, with startling 87.6 percent accuracy.

Derwent Capital Markets, a London-based hedge fund set to open for public investment on April 1, has pooled together $40 million to obtain exclusive rights to the Twitter predictor, according to the Indiana Daily Student. Bringing on Bollen and Mao as personal consults, they plan to create a trading model based on the findings.

Hawtin, co-owner of new hedge fund, ran with the idea after seeing the findings reported on television. "The only risk for us is if Twitter falls away," Hawtin told Bloomberg. "But we believe that it can only get bigger and better."

It's not surprising Professor Bollen decided to join the upstart hedge fund. He's been itching to test his algorithm in the marketplace since the paper's publication, telling Wired in October that it was time to "put some of our money where our mouths are, and try to do this in real time."

Bollen, however, wouldn't call his research groundbreaking. "[P]eople have been using [methods like] this," Bollen told the Indiana Daily Student, citing extensive use of blog and news analysis for similar purposes. "It could... be that we were the only fools that published their results."

Bollen's correct that he isn't the first behavioral economist to research unexpected Wall Street correlations. In 2004, Massey University Professor Ben Jacobsen and Erasmus University Rotterdam Professor Wessel Marquering published a paper entitled "Is it the Weather?" refuting a then-popular notion that temperature or Seasonal Affective Disorder affected the outcome of the stock market.

Comments

[Socionomics]

05:19 PM on 03/25/2011

If you're in the Atlanta area on April 16, Bollen and Mao are scheduled to present their findings at our Socionomics Summit at the Georgia Tech Conference center. More info, along with free audio content here - http://www.socionomics.net/education/socionomics_summit/twitter-mood.aspx?LJ

[OldHenry]

03:13 PM on 03/23/2011

The wisdom of crowds.

[gokulram arunasalam]

10:59 AM on 03/23/2011

Gokulram Arunasalam
Not sure how feasible the strategy is. Efficient markets theory has taught us (and empirical evidence has shown) that when many use a particular indicator to take a view on the market, it typically competes away all alpha.

[grione45]

10:55 AM on 03/23/2011

Great. Let's make more hedge fund managers rich while the bread lines grow longer.

[El Chingaso]

02:17 AM on 03/23/2011

Oh, no! It's chicken little...to the rescue.

This is what things have come to.

[Xoblau Triv]

09:54 PM on 03/22/2011

This guy already doing it publicly at http://nnatch.com

[whirosi]

01:17 AM on 03/23/2011

Hilarious if we start seeing Angry Stocks @ 99c/prediction! LOL
That's probably gonna worth $200M!
http://www.businessinsider.com/rovio-valuation-200-million-angry-birds-2011-3

[joni brit]

08:57 PM on 03/22/2011

that's so cute, in twitter language it's 'predicting', years ago, it was 'insider trading', regardless, if you snooze, you lose, just get there first!!!

[mogulmag]

03:43 PM on 03/22/2011

Hedge Fund CAN NOT LOOSE! For sure had placed CDO!. I f they loose WE THE PEOPLE will bailout them again!

[markgendala]

03:19 PM on 03/22/2011

Dear Editor,

I thought such announcements are traditionally made on the 1st of April - perhaps your
highly talented professors are too busy to bother with the accepted social norms -

As that auspicious date is nigh upon us, could I chip in with a hitherto just rumoured but
equally breathtaking revelation -

"After a long secret session, US Congress has just passed the "No American Professor
Left Behind" higher education legislation which President Obama is expected to sign into
law any day now...
The legislation requires that in order to become more familiar with real life, every 4 years
an American professor has to take 1 year sabbatical to work at least 300 days at 8 hour
shifts in one of the four federally approved occupations - TAXI DRIVING, FRUIT PICKING,
PIZZA DELIVERY or DOG WALKING"

Sincerely,
Mark Gendala
Melbourne, Australia
www.ssotu.com

[wonmean]

03:46 PM on 03/22/2011

Who are you and what the heck is your website about?

[markgendala]

05:45 PM on 03/27/2011

Thanks wonmean,

If you superimpose upon two different entities A and B some variable "x", then "x"
can be so adjusted through steps "x1, x2, x3, x4...xn", that at some point, say it's
step "x173", either Ax and B or A and Bx can be considered EQUIVALENT to one another.
The understanding of EQUIVALENCE - the universal impetus behind the emergence
of Mathematics, is often called "intelligence"...

Stay well,
M.G.

[adsonamerica]

03:08 PM on 03/22/2011

I can't wait to see how this turns out.

[MikeDu]

03:04 PM on 03/22/2011

The point of hedge funds is for the managers to skim exorbitant salaries from the top so they get rich whether your funds tank or not. That's become the 'American way'. The purpose of corporations used to be to enrich their stockholders. Now the pupose is to enrich the corporate board of directors. Mom & pop shareholders have been lumped in with the rest of the suckers nowadays.

[Aj Beamish]

02:30 PM on 03/22/2011

Nice, more fuzzy math to help speed our ultimate demise.

Didn't Obama say something about reigning this type of adolescent, volatile behavior in?

[wonmean]

03:47 PM on 03/22/2011

Psst, rein, not reign.

[Aj Beamish]

04:37 PM on 03/22/2011

Psst, a it's a forum post not an entry for a Pulitzer!

You're right though.

[darter22]

02:12 PM on 03/22/2011

Even if the timing indicator is accurate, you still need effective money management techniques to profit.

[Jon DeLuzio]

02:09 PM on 03/22/2011

Fascinating. Jon DeLuzio

[Pharoah Narim]

01:34 PM on 03/22/2011

WTF?!?!?!?!? This is exactly why the economy is shot. Noooooo....we can't get 40 million to invest in a new plant that makes something or upgrade infrastructure beneficial to business.... noooooo...we have to dump 40 mil in some voodo software to help paper traders suck more money out of the real economy. Software that wont even work because it assumes tweeters are invested in the market. I would guess many are not and the ones that are aren't active traders. Great. Just effin great.