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Hedge Funds Look to Social Media for Latest Edge

10 June 2012 in Trading Ideas

Welcome to the brave new world of “social finance.”

As Barrons.com’s Brendan Conway reported recently, one of the newest hedge-fund strategies is building financial models to track sentiment and trends on social media sites.

“If you can figure out what types of utterances on Twitter or, say, StockTwits correlate with a trend in the market, you can trade on that information. I haven’t yet come across any reliable and detailed public figures to quantify this phenomenon. But then, that’s probably the point. This area hasn’t yet been arbitraged to Kingdom Come,” Conway wrote.

The article gives the example of Estimize.com, which professes to “publish your view of where a company’s  most important fundamental metrics are headed.” This dovetails with the idea that investors can “crowdsource” views of a given stock or sector.

As Conway puts it, hedge funds “are starting to treat the mass of opinion and activity on social media much like any other data input.”

For now, the trades are likely focused on gaming early trends and related arbitrage opportunities, Conway wrote. But who knows what algorithm-obsessed “quants” will come up with?

Any edge for hedge funds has been sorely needed. The average fund dropped  4.8% in 2011, compared to a flat finish for the S&P 500.

How do you think the boom in social media will affect investing?