"Twitter hedge fund" founder launches new firm

24 Jun, 2013

Paul Hawtin, founder of the so-called “Twitter hedge fund” back in 2011, has re-emerged to set up another investment firm employing a similar strategy.

This comes two years after he established the Derwent Absolute Return Fund, which used algorithms to mine multiple social media sites to gauge investor mood and sentiment, and thereby trade off it. While the fund shuttered in February 2013, this has not deterred Hawtin from unveiling his latest venture – Cayman Atlantic, which uses a strategy that unlocks hidden trading opportunities within real-time social media data.

“Various academic studies have shown that there is a high correlation between the sentiment on social media and underlying markets. Admittedly, the data is limited but it does show a significant degree of correlation. Nowadays, social media, which used to focus on sentiment, is now being used to discover breaking news. It allows us to monitor events in real time. Our algorithms can search for key words, and then send relevant Tweets to our traders, who then decide whether or not to trade off it,” said Hawtin. 

According to a University of Manchester research paper – “Twitter Mood predicts the Stock Market,” there is an 87% correlation between the Dow Jones Industrial Average and sentiment on Twitter. Nonetheless, Derwent Absolute Return Fund struggled to take off, not because of substandard performance but rather investor conservatism.

 “Ultimately, with the Derwent Absolute Return Fund, we had to shut because we didn’t raise enough money. We launched just before the US lost its AAA rating, and the market went into free-fall, prompting risk aversion among investors, which hurt our business,” he said.

Cayman Atlantic, on the other hand, is up 13.76% since it commenced trading in July 2012.

However, there are challenges for Cayman Atlantic. In 2013, hackers breached Associated Press’ Twitter feed and falsely claimed the White House had been bombed. This facilitated a brief drop in the market, although Hawtin is prepared for such eventualities.

“When we see a Tweet, we assess who it is from. We look at how many followers that person has, how big they are, the information they have posted previously, and how many re-tweets they have had. Even if a Tweet is fake, like with the Associated Press case, it is still a source of information and can have a huge impact on the market. In such a scenario, we will pick up the Tweet and place the trade, but we will be able to pick up corrections very quickly,” he said.

The Securities and Exchange Commission (SEC) recently said it would allow companies to use Twitter, Facebook and other social media to announce company information providing they inform investors about which sites they intend to make these disclosures. “I do not think the SEC’s announcement on social media will help our strategy but it shows how important the relationship between financial services and social media is nowadays,” said Hawtin.

In terms of investors, Hawtin is marketing to high-net-worth individuals (HNWIs) and family offices, and is hoping to raise £50 million. The firm will also offer Managed Trading Accounts to investors, with a £100,000 minimum investment requirement. “Investors have got more accepting of our strategy over the last year or two,” said Hawtin.