New York (HedgeCo.net) – In an ever changing world of technological innovation and the incredible growth of social media sites like Twitter, Facebook and LinkedIn, it seemed only natural that investment firms would attempt to take advantage of the technology to gain an edge. In reality, the idea has been far from a success.

Twitter in particular has been the focus of several studies where algorithm based data collection has attempted to capture the sentiment toward a particular stock or a sector. The unfortunate fact is that there has been little success from the studies.

A recent article from eFinancialNews outlined some of the findings from the studies. One such study was performed at the request of UBS Asset Management and it was conducted by Max Anderi, a hedge fund manager that manages a European equity long/short fund. When describing the data collected, Anderi stated “It was messy, not conclusive and unclear what to do with it,” adding that, “The biggest problem was making a timely decision. In order to make money of it, we would have to be milliseconds faster – it is an incredibly competitive area.”

Another study from the European Central Bank did show some success, noting that a high level of bullish chatter on Twitter “indicates an increase in daily returns on the following day”.The article from eFinancialNews also quoted Guillermo Valencia, founder of Macrowise, a research firm based in Bogota which specializes in behavioral finance tools. “The world is flooded with data and research. However, it does not mean that there are effective thinking frameworks that produce alpha,” Valencia said. “High-frequency data is often highly correlated and in some way these data confirm what we know about something, but do not provide new information.”

Rick Pendergraft
Research Analyst
HedgeCoVest