Derwent Launches Social Media Fund
Monday, May 23, 2011

Derwent Capital Management has launched a 'social media' hedge fund, which bases its investment decisions on an analysis of postings to social networking websites such as Twitter in order to gauge investor sentiment and thus predict market movements.

The fund, based in London and domiciled in the Cayman Islands, will be Europe’s first to utilize sentiment derived from real-time social media data analysis.

According to Paul Hawtin, Founder and Fund Manager, the fund's portfolio will consist of liquid equities and equity indices with the aim of achieving consistent absolute returns for investors.

The idea behind the fund is that the analysis of social media networks on a real-time basis will provide the fund manager with valuable insight into the "fear and greed" which often drives market movements.

Hawtin comments: “For years investors have widely accepted that financial markets are driven by fear and greed but we’ve never before had the technology or data to be able to quantify human emotion. This is the 4th dimension."

Dale Gabbert, funds partner at Reed Smith LLP, which is advising Derwent Capital Markets added: “Social media is not just changing the way we live, it is now also changing the way we invest."

Academic studies claim to have shown that there is a distinct correlation between the fluctuating 'moods' of investors, as represented by postings on social media sites, and movements in stock markets. Harvesting keywords from these sites to formulate a 'mood index' researchers at Indiana University and the University of Manchester achieved a 78% accuracy rate in predicting the closing value of the Dow Jones Industrial Average Index during a trial in 2008. Impressive as this sounds, no system is perfect, however, as the experiment failed to predict a huge upswing in the index on the day the UK bank bailout package was announced in October that year, despite the market's apparent lack of confidence.

Nonetheless, investor interest in Derwent's fund has been strong, resulting in a delay to the fund's original February launch date. The fund is targeting returns of between 15% and 20%.