It seems everyone in the investment industry is jumping on the Twitter bandwagon these days in the hope that they'll spot some market-moving data before the rest of the world catches on.
But have you heard of anyone making a success out of this? Probably not.
Enter a new hedge fund that may have found a way to filter out noise created by millions of tweets and trade profitably.
Paul Hawtin, CEO of investment management firm Cayman Atlantic, is launching a fund this month that bases its entire trading strategy on social media posts from Twitter and Facebook (FB).
Hawtin's firm has been working for three years to develop proprietary technology that uses filters and algorithms to scan the 400 million tweets that hit the web each day, distilling the information to an average of five key tweets.
Cayman Atlantic will then make trades in global equities or commodities based on those tweets.
"We are trying to detect events that are breaking out on Twitter before the press, the media and the world are hearing about it," said Hawtin.
The firm makes trades based on both general market sentiment and important one-off events, with the goal of returning at least 12% per year to investors. Hawtin has been modeling the strategy over the past 11 months, making a return of 18%. The Dow Jones Industrial Average has returned about 25% during the same period.
Hawtin said his analytics tools can spot whether sentiment towards a stock or market is deteriorating, allowing him to take a short position well in advance of a broader move by other investors.
The system also hunts down tweets about critical, market-moving events so traders can take action. Even if a tweet turns out to be wrong, Hawtin still sees an opportunity to make money.
When the Associated Press Twitter account was hacked to issue a false tweet about an explosion at the White House, Hawtin was able to take advantage of the sharp fall in stock markets that followed.
"When our system notified us of the AP tweet I was doubtful of its authenticity," he said.
"However, because it came from an approved handle with over 2 million followers... I knew it would have an impact on the markets albeit only for a few minutes until AP officially removed and corrected it."
The new fund, which operates from London and the Cayman Islands, is Hawtin's second Twitter-focused fund. The first, launched by his firm Derwent Capital Markets in July 2011, shut after a month due to low demand and tough market conditions.
Hawtin said the new fund is structured differently, offering improved liquidity and better analytics technology.
Investors will have to cough up at least £100,000 ($150,000) to open an account, and the fund can only start accepting deposits after getting a final nod of approval from the Cayman Islands Monetary Authority, which is expected later this month.
For those who are interested in using Twitter and Facebook to make their own trades, other companies such as Dataminr offer social media filtering services for a fee.
Hawtin said his fund was inspired by an academic paper by professor Johan Bollen from Indiana University that showed how general sentiment on Twitter could be used to predict shifts in the stock market with over 80% accuracy.
5 Things to Do Now That Warren Buffett Is on Twitter
New Hedge Fund Aims to Profit from Twitter Trading
One critical question is what sort of celebrity Twitter user Buffett will turn out to be: the laissez-faire famous person who rolls with the hoi polloi's punches, or the hypersensitive control freak who cannot brook the slightest mischief or criticism? There's only one way to find out which alternative Buffett favors, and that's to test him through vigorous trolling.
There are lots of options. Many conservatives dislike Buffett -- whom they might be expected to admire, given his enormous investing success and cheerful advocacy for the U.S. economy -- because of his support for Barack Obama. Particularly galling has been his endorsement of the president's proposal for higher taxes on upper income earners, encapsulated in the so-called Buffett Rule. Buffett's invocation of his secretary, who he has said pays more in federal taxes as a proportion of income than he does, has become a source of mockery; why not ask Buffett why the secretary of the richest investor on Earth isn't a member of the one percent herself? Seems only "fair," to use a word the president favors in this connection.
For those on the left, Buffett's status as arch-capitalist dealmaker offers a few openings. There have, for instance, been questions about what he knew, and when he knew it, before making a $5 billion investment in Bank of America (preferred shares, of course) in August 2011. Shortly after Buffett's purchase, word got out of extensive job cuts (40,000 employees) and the firings of two executives -- restructuring moves likely to raise the bank's stock price. "Did [Buffett] have inside information that other investors were not aware of?" asked bank analyst Richard Bove. "Did he know that there were going to be these two major announcements at the time he made his investment? If he did know, I think it is illegal." These questions are under 140 characters, so have at it.
Bagging the scalp of a verified Twitter user for your followers list can seem like a daunting task. You can do it, though, take it from me: for some reason, I'm being followed by POLITICO's chief economics reporter.
Buffett -- who currently follows zero accounts, despite having received tweets of welcome from such luminaries as @BillClinton, @BillGates, and @BarackObama -- seems like a hard nut to crack. You might have a slight advantage if you're female, since, in the words of a recent essay written for Fortune (and promulgated as his second tweet), "Buffett is bullish... on women." It might also help if your avatar is a picture of a Cherry Coke Can. Buffett failed to identify his favorite soda in a blind taste test conducted by Bloomberg, so we're guessing it's the #branding he likes.
Once you've gotten Buffett to follow you, you'll be able to send him a DM, Twitter's private and confidential telegram. This is an ideal step toward actually hanging with Buffett, which is generally a possibility only for those rich enough to partake in charity auctions. (Last year's winning bid for lunch with Buffett was $3.46 million.)
Some activities that might pique our subject's interest, and which you might consider suggesting: playing bridge, which Buffett once said "is such a sensational game that I wouldn't mind being in jail if I had three cellmates who were decent players and who were willing to keep the game going twenty-four hours a day"; flying around in his private plane, which he once identified as one material thing that makes his life more enjoyable; or reading the newspaper. Buffett owns more than 70 of them, reads five a day, and recently admitted, "It's almost unnatural how much I love newspapers."
Sometimes, those with large Twitter followings will lend their extensive reach to lesser entities looking to spread a worthy message. As a consequence, the retweeted account often gains additional followers. #WinWin.
Buffett has just surpassed 400,000 followers, an impressive rate of influence-accrual. And he has an intense affection for charity, having pledged to donate more than 99% of his wealth. So your best bet, if you want that @WarrenBuffett RT, is to ask nicely on behalf of a good cause.
For companies, a stock purchase by Buffett is more than a welcome dose of capital; it's a vote of confidence from history's most storied value investor (i.e., one who seeks strong businesses whose shares are underpriced). An endorsement via Twitter could have similar significance.
The recent hack of the Associated Press account showed that even fraudulent tweets can have dramatic effects on trading. Crack Buffett's Twitter password, send a few market-moving tweets under the aegis of that coveted blue-and-white check mark, and you might be able to make off with a lot of money. Or you could just short Berkshire Hathaway and announce the famously long-serving Buffett's retirement, effective immediately. That would be simpler.