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"Twitter-verse". Nice.
HP has actually been mining the social media world for a few years to predict the opening weekend sales of movies. One recent title was predicted to be a blockbuster by media analysts. HP said it was only going to make 28.8 million. The result? 28.5 million. Far fewer people will be tweeting about hedge funds than movies, but it is a proven concept.
Tom -- There are many people who are terrible at predicting the stock market, who have no investment knowledge, and are consistently wrong (say 70% of the time) in their predictions. As long as they are consistently wrong, using their forecasts (changing their 'buy' signals to 'sell') is better than using forecasts from great sophisticated investors who are correct only 60% of the time.
The stock market typically works in a way that is counter-intuitive, and behavioral trading is what kills the novice. Exploiting the novice's ignorance (via his/her tweets) could indeed work well.
Similarly, exploiting pump-and-dump price alerts scams (email spam that you get in your mailbox or by fax) can work very well, if you change the recommended action from "buy" to "sell", assuming you wait long enough before receiving the spam and short-selling the recommended stock (indeed, you can do statistical analysis to determine the optimal time lag between receiving the spam and proceeding to a short sale).
It depends how the data is used. You can cluster Twitter users in 3 categories:
You can also be more granular, e.g. identify users who usually make correct predictions but only for some categories of stocks. Then your leverage their tweets, but only for these particular stocks. You can also gather info about the twitters (e.g. education level if available in profile) and create a mathematical model that tells you how to leverage tweets based on education level / location / gender etc. And you should also compute the optimum time lag between when a tweet is made, and when it can be used to buy / sell stocks.
This seems like a pretty irresponsible thing for a hedge fund to do, but I'm not surprised. Do we really need more junk science? This also runs contrary to tradition wall street sentiment indicators which say the best time to be in the market is when you are ultra-pessimistic.
I've been trying to track down the original "research study" with no luck. So without that, I will judge it to have about the same amount of predictive power as handwriting analysis.
-Ralph Winters
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