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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?"
Twitter may have finally found a way to make a profit!
If what I just said sounded like a troll, it was probably just a failed attempt at humor.
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.
I think twitter will have the same effect as a monkey throwing darts...
http://www.automaticfinances.com/monkey-stock-picking/
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.
There is a movie (he takes some pills to make him "smart") based loosely on a guy making a fortune in the stock market by ignoring logic and stats - by just watching rumours and hype he predicted the market.
This is absolutely brilliant because it tracks what the stock market is actually driven by, personal opinion. There's a lot of data that goes into peoples' investment choices, but in the end the stock market is more about what people THINK is valuable than what is actually valuable (Keynes described this using a beauty contest analogy: http://en.wikipedia.org/wiki/Keynesian_beauty_contest). Twitter is a great way to tap into that data as people freely and in real time report how they are feeling about various stocks.
Of course this also suggests that stock markets are totally bogus, but that's another story...
Now a Twister-Based Hedge Fund would be a lot more fun than a Twitter-Based one...
ttyl
Farrell
CAN-CON 2019 - Ottawa's only book oriented Science Fiction Convention! October 18-20, Sheraton Hotel, Ottawa, Canada h
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.
Sounds like the theory from the movie "Limitless" put into practice.
Probably just as accurate to boot.
Atlas Shrugged : Thematic Story
How much of this is attributed to excessive tweets due to, and in conjunction with, a highly volatile market?
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.
your thin skin doesn't make me a troll
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.
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 try to beat the market. And if you put your eggs in their basket they are subject to the same luck as everyone else.
His advice that has helped me grow my portfolio?
25% in S&P 500 fund
25% in Gold Bullion
25% in 30 year US Treasuries (Sell and buy new ones when they get within 25 years of maturity)
25% in Money Market.
Rebalance once a year.
I love Jesus, except for his foreign policy.
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...
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 customers and you'll generally find successful businesses. The other variable here is consumer confidence. Not a judgment of a single business, but the willingness of people to go out and spend. Particularly for discretionary items. Twitter is probably as good a place as any to track social trends that affect these kinds of variables.
Have gnu, will travel.
Even if it worked and their success was not just random chance, it will now no longer work for the simple fact that now it's widely known. After all, Twitter isn't exactly a secret resource. People will start gaming the system, for sure.
The Tao of math: The numbers you can count are not the real numbers.
IFF any of this is true, then this methodology maybe useful for day trading, quickly getting into market, quickly getting out of it, things like that. This is not for investments made based on understanding of market fundamentals. Of-course none of the advices that are given by main stream 'economists' and speculators have anything to do with fundamentals. If you want to invest and not day-trade, you have to understand the fundamentals, and to do this you cannot rely on anything that is considered main-stream, because main-stream is all completely off, it's all Keynesian in nature, most of it is about 'sentiment', so they are talking about feelings and things they consider to be 'fair' or 'unfair'. Hopes and feelings have nothing to do with the fundamentals, there you have to follow real economics, and it's Austrian, so for fundamentals look at Jim Rogers, Peter Schiff, Ron Paul, Max Keiser, Marc Faber, people like that. Why does it make sense? Well, consider that by understanding the fundamentals Ron Paul predicted where the US economy was going to (see my sig), Schiff predicted the Internet and Housing bubbles, same with Rogers (the guy made over 4000% profit in the last decade alone.)
You can't handle the truth.
I wonder how the twitter fund is doing with the sudden 500 point drop in the Dow this morning...
Would love to see someone figure out how it works and get it to buy some crappy penny stock in order to dump it. What a great use of twitter spam.
As others pointed out,
"This is absolutely brilliant because it tracks what the stock market is actually driven by, personal opinion"
"The market itself is just the result of the combined emotional responses of investors"
having gained and lost $250k in the stock market myself in the go-go dot.com days, I can look back with 20/20 hindsight and can categorically state that the market is just the herd instinct. Remember the Eddie Murphy/Dan Aykrody 1983 movie "Trading Places"? remember how the Duke brothers tried to corner the orange juice market? and then the other traders in the pit said "hey, let's get in on that action!"
from wikipedia:
"The story about the Dukes' cornering of the orange juice market was probably inspired by the "Silver Thursday" market crash of 27 March 1980, during which the Hunt brothers of Texas tried to corner the silver market and subsequently failed to meet a $100 million margin call."
since they are tracking the herd mentality via social media, they will probably have more winning averages than not. time to take a closer look at their business model.
I'm good with numbers -
..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
I am putting myself to the fullest possible use, which is all I can think that any conscious entity can ever hope to do.
"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 the Gambler's fallacy here, but does anyone want to expand on the coin analogy, i'd love to see it.
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.
John_Chalisque
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.
Violence is the last refuge of the incompetent. Polar Scope Align for iOS
I was reminded of Bayesian Inference, 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 behind it.
A NYC lawyer blogs. http://www.chuangblog.com/
I saw something on a BBC show called The Code. A guy walked around an office asking people how many jelly beans were in a big jar. Answers ranged from 40 to 80,000, when the actual answer was something like 1440. He asked 160 people, and when averaged, the final figure was 1445.
There is wisdom in crowds. Specially regard the stock market, which it's the crowd sentiment that determines the stock price, not the value of the company.
... tweet me a new minivan!
Something that takes as it's input random psychological output from many sources does well at predicting the performance of a system that takes as it's input random psychology? Makes sense, actually. The stock market isn't always governed by rational decision making. What they seem to be attempting is to cut out trying to evaluate the rationality of people's though processes, but just observing them. The danger here is that if enough people behave stupidly, this thing might enhance that through it's transactions and the resultant feedback, but that's a danger of any system.
You are not the customer.
Not blind luck: Insider Trading. If Twitter's not a news source and is instead a "social medium" then you're getting hot tips from insiders somewhere in that mess.
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 question.
If anyone could pull this off, they'd make a fortune until someone, somewhere made it illegal. I guess the trick would be to not tell people how you did it - though that WOULD lead to charges of insider trading.
politicians are like babies' nappies: they should both be changed regularly and for the same reasons
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 can always go into dart board sales, I'm sure we'll be using a lot of those next to predict futures.
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 result looks very interesting. If it really proves to be statistically significant, one can expect more and more traders using these sorts of algorithms. Perhaps real-time aggregate data like this WILL prove to be very valuable. As a previous poster mentioned, maybe this is Twitter's "Killer App". With more and more real-time social networks coming into play, what other sources of data might be useful? What will happen to the market if a substantial portion of trades is driven by sentiment driven algorithms? Will it become wildly unstable (like when some computer trading programs run amuck?). Or will it become very smooth with short-run sentiment merging seamlessly into long-run data?
I wonder if this hedge fund is still open to new investors?
One day I feel I'm ahead of the wheel / the next it's rolling over me / I can get back on / I can get back on
I interviewed at a Wall Street startup that was trying to do something similar. They test against historical data prior to buying and selling on the open market.
I would assume they are doing the same thing. That said, one month is nothing.
Except for ending slavery, the Nazis, communism, & securing American independence, war has never solved anything.
I wonder what trades would be made based on that tweet...
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.
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.
Deleted
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.
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.
Having to work for a living is the root of all evil.
Austrian economics teaches that value is subjective. It also advocates ordinal utility as opposed to cardinal utility. Now it's nearly impossible to know what everyone's subjective valuations and were it sits on their ordinal scale. But if people are discussing a product it means that's it's important to them, chances are that they place a higher value on it and place it higher on their value scale.
The top-down approach hasn't served us too well when it comes to predicting so this bottom-up approach is actually kind of exciting. If they can get good at predicting the data, IMHO, this has real potential.
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.
emotions might help make pretty good (and quick) decisions in the short term, but it's true, aiming for long term cannot depend on emotion. it has to be based on solid, concrete data. for example, i could choose to eat pepperoni pizza for dinner based on emotional responses to the smell. however if i had a goal of becoming vegetarian, i should not be choosing to to eat pepperoni even if it smells good.
even if twitter feeds seem like real data, sentiment analysis is aggregating emotions of a crowd. Justin Bieber might be a 'hot trend' now but you cannot assume his popularity will remain for generations to come. Many fans like him for qualities that cannot be preserved for long (i.e. young face, young voice). Choosing stocks based on hard data is like admiring a singer for inherent qualities, like talent.
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