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Hedge Fund Turns to Twitter for Trading Model

by Terrence O'Brien on December 24, 2010 at 03:00 PM

Stock Market
Derwent Capital Markets, a British "investment boutique" with roughly $39 million tied up in its Derwent Absolute Return Fund, is turning to a unique source to determine its trades. Using research performed at Indiana University, Derwent will be basing its trades on Twitter posts. In October, researchers at the university declared that, by monitoring Twitter for mentions of certain words, they could predict moves in the Dow Jones with nearly 88-percent accuracy. Derwent is putting money behind the research, and using it as the foundation for trading models and algorithms, which will determine the best trades.

An actual hedge fund putting real money on the line shows just how valuable a social network can be. But, as the Observer points out, there is potential to game the system. It would be simple enough, it seems, to create an army of Twitter bots that spit out messages to manipulate the fund's trading model. With only one hedge fund riding the Twitter wave right now, though, it hardly seems worthwhile for scammers and frauds to target Twitter and manipulate the market. Derwent will put the new system into action in February, and we'll just have to wait until then to see how effective social networking-based trading will be.

Tags: derwent capital markets, DerwentCapitalMarkets, HedgeFunds, SocialNetworking, StockMarket, top, twitter, web

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