A HEDGE fund that plans to use Twitter sentiment to predict the stock market has seen so much demand from investors that it has been forced to delay its launch and change its corporate structure to accommodate more investors, according to one of its founders.
The Derwent Absolute Return Fund Ltd, in the process of being set up in the Cayman Islands, was supposed to launch April 1 with $40 million in assets, but the fund now has expressions of interest from investors around the world totaling almost $100 million.
This has forced two-year-old Derwent Capital Markets, a boutique investment firm run by brothers Paul and Simon Hawtin, to revise the corporate structure of the fund. They also are awaiting approval from the UK Financial Services Authority to a change in the nature of their investment business.
“Delays surrounding any pending Fund launch are a result of investor interest being way above our initial expectations,” Paul Hawtin, Managing Director and Founder of Derwent Capital Markets, told IR Web Report in an emailed statement that was copied to the firm’s lawyers, auditors and administrators.
“Our Master Investor list of interested parties currently stands at £58.4m ($95 million) of which £25m ($40 million) are firm commitments to subscribe for shares in the Fund during the Initial Offer Period,” Hawtin said.
Predicting Dow with 87% accuracy
Among its tactics, the Derwent fund plans to use sentiment signals from aggregated Twitter messages to predict short-term changes in broad stock market indices. The strategy is based on research last year by Johan Bollen, Huina Mao and Xiao-Jun Zeng who published a paper (PDF 350KB) finding that changes in sentiment among Twitter users predicted moves in the Dow Jones index up to six days in advance with 87% accuracy.
There is growing interest among researchers and investors in using Twitter to analyze investor and public sentiment as a way to predict stock prices. As we reported recently, Twitter is a major input into several services that are analyzing sentiment on the web to discern trading signals for investors.
And yesterday, the BBC highlighted a new website called TweetTrader.net that was created by PhD student Timm Sprenger at the Technical University of Munich who found that investors following stock market tweets could have achieved an average return rate of 15%.
Update: The Folly of Trading on Twitter Sentiment looks at the issues around this fund. Is this a sign of Bubble 2.0 or legitimate investment strategy? I say the latter.