Hedge Fund to Use Twitter to Predict the Stock Market

And people wonder why making money in the stock market is a crap shoot. A hedge fund will open in February that uses "Twitter sentiment" to predict the stock market.

The British hedge fund is named Derwent Absolute Return. Its founders say they have an algorithm that can analyze sentiments on Twitter. Here's how its described:

The Derwent Absolute Return Fund Ltd., set to start trading in February with an initial 25 million pounds ($39 million) under management, will follow posts on the social-networking website. A trading model will highlight when the number of times words on Twitter such as “calm” rise above or below average.

A paper by the University of Manchester and Indiana University published in October said the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. 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.

In October Johan Bollen, Huina Mao, and Xiao-Jun Zeng wrote a paper called “Twitter mood predicts the stock market" (.PDF). Derwent Capital Markets has already signed an exclusive deal with Xiao-Jun Zeng of the University of Manchester to develop the research into trading models. Derwent also plans to meet with the other two researchers, who are both from Indiana University, to discuss the possibility of them working on the new fund, as well. Derwent expects an annual ROI of between 15 percent and 20 percent on the new fund. 1.5 million pounds of the initial 25 million pound stake will be the managers’ own money.

It already causes a panic among the general populace when Twitter goes down. Can you imagine on what will happen in this case? You can watch an October interview with Bollen, describing the research, below.