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?"

Comments

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:One whole month!

[TheRaven64]

There's an old scam that works because of this. You set up a few funds, say 30, and make random trades with each one. On average, most of them will do about as well as the market as a whole. A few of them will do much worse. You close these. A few will do much better. You then get people to invest in these (with the obligatory disclaimer that past performance does not ensure future returns).