Want to stay ahead of the Dow Jones? Apparently, the new way to do it is to pay attention to Twitter. A paper from the Universities of Indiana and Manchester called “Twitter Mood Predicts The Stock Market” seems to suggest that the overall mood of the social network is a surprisingly good indicator of where the market will go soon afterwards. Academics Johan Bollen, Huina Mao and Xiao-Jun Zeng tracked 10 million tweets from 2.7 million people in 2008 and discovered that the Tweet crowds appeared to accurately predict the daily up and down changes in closing values of the Dow Jones Industrial Average 87.6% of the time.
Surprisingly enough, such crowdsourcing isn’t unique: Pace University of New York doctoral student Arthur O’Connor has compared Twitter, Facebook and YouTube data with stock prices for Starbucks, Coca-Cola and Nike over a ten month period and found, again, that social media can be used as a reliable predictor of stock movement. So should you start trusting Twitter with their money? A hedge fund opening for outside investors April 1st is ready to help you do that very thing. Formed by Paul Hawtin of Derwent Capital Markets, the £25 million fund will use Bollen, Mao and Zeng’s paper as its basis, and bring both Bollen and Mao on as private consultants. Hawtin is optimistic about its success:
I’m talking a consistent 15 to 20 percent absolute returns. If the markets are down a whole year, we’ll still be up 15 to 20 percent. I expect by the summer months to be at 50 million pounds.
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