The only dedicated “Twitter” hedge fund has shut down after deciding to offer its social media indicators to day traders instead.
Derwent Capital Markets’ Absolute Return fund was quietly liquidated just a month after starting up last year. Paul Hawtin, chief executive and founder of Derwent Capital, said that one of its largest investors suggested taking the trading signals to private investors rather than trading on them directly.
“As a result we made the strategic decision to close the Derwent Absolute Return fund and invest directly in developing an online trading platform,” he said.
During the one month for which the fund was open, it returned 1.86 per cent in its sterling shares, ahead of the market and the average hedge fund.
Derwent examines tweets from users of Twitter, as well as messages posted on Facebook and other social media, and creates measures of sentiment towards individual stocks, wider markets and even commodities. Mr. Hawtin said that moves in sentiment tended to give a lead of about three days on price moves.
The hundreds of millions of tweets sent each day have generated significant interest from academics as well as high-frequency traders. Several studies have shown that a useful measure of sentiment can be created from the flood of messages, although few funds seem to invest on this basis so far.
The decision by Derwent to shut its hedge fund last year followed the closure of another fund dedicated to trading on signals from interpreting social media, and also corporate speeches, run by California-based MarketPsy Capital. MarketPsy now sells its sentiment indicators, but plans to open a new private fund this summer after tweaking its algorithms.
One large hedge fund investor said that at least another two groups had tried to launch social media-based funds last year, but had decided not to go ahead.
Derwent is now launching a system for private investors that overlays its Twitter-derived measures of sentiment on the IG Group’s spread-betting trading platform.
Mr. Hawtin said: “The problem with hedge funds is that it is a very difficult product to market and there’s a very small clientele who can even know about it, let alone use it.
“The information we are using [from Twitter]is from the mass market, anyway. In return we’re saying to these people, ‘You can use these signals yourself.’ ”
Derwent is aiming to attract between 3,000 and 5,000 customers to trade through its system, taking a cut of the trading fees from IG. Clients will be able to access a range of sentiment measures and be alerted when sentiment towards their favoured securities moves sharply.
Derwent’s measure of global sentiment is not yet as bad as at the worst point last year.