A continuously changing market environment, coupled with forward-looking uncertainty are pushing hedge fund managers to look at how they can effectively leverage historical data, fundamental analysis and technical indicators to obtain more tangible results.
Traditional strategies to harness data across multiple sources has presented limitations, which in turn have seen fund managers turning to analyzing social media sentiment for market predictions and using available sentiment analysis to support broader investment ideas.
Already, studies have shown that by utilizing sentiment data from social media to obtain a more comprehensive narrative relating to stock market and fund performance may deliver some promising results in the near-term.
Social media provides managers an endless reservoir of public data that can help deliver sentiment-driven analysis throughout different market periods, and in turn use this data to reinforce their market or investment strategies.
How fund managers can turn social chatter into trading signals
By analyzing online insights obtained from social media, hedge fund managers can track emerging market trends and gain a deeper understanding of how sentiment surrounding market conditions can influence their decision-making.
Tracking investor and market sentiment
For hedge funds, social media provides an in-depth look into how investors and markets react to various external factors. For instance, hedge funds can assess investor sentiment relating to financial markets, economic data, or price movements. Through this, fund managers can track, analyze, and deliver a more insightful understanding of how market reaction impacts the overall performance of certain assets and securities.
Market sentiment is constantly changing, and for hedge fund managers this requires them to keep a close eye on how new trends will shape the outlook for specific stocks, commodities and securities such as foreign exchange or cryptocurrencies. Should market sentiment begin to change, in either direction, hedge funds can adjust their holdings more appropriately.
Contrarian sentiment observation
There are plenty of experienced investors that use social media to share their views and opinions regarding a specific security. In some instances, investors will share sentiment regarding corporate earnings, and how their outlook will change their position on the company’s stock–bullish or bearish?
Though contrarian views will present hedge funds with a view on investors being bullish or bearish, depending on market euphoria, which in return could indicate whether investors are sharing in a herding behavior. This will indicate to fund managers the factors that could be driving their behavior, and whether the sentiment momentum will help drive prices higher or lower.
Tracking major market events
Numerous financial and market-related events can change investor behavior, i.e. weaker corporate earnings, slowing economic outlook, policy changes. These actions result in event-related investing, which shapes investors opinions towards certain securities and assets.
For many, social media is an outlet where they can share these events in real-time. Hedge funds can look at how the overall reaction towards a specific event will shape the narrative of the market or a specific investment vehicle. For hedge funds, this provides constant, real-time updates related to a specific event and security, which may help to uncover trends, or signal potential risks.
Fund risk management
Hedge funds that monitor social media sentiment will have a better understanding of potential risks and threats that could emerge in the market. For instance, hedge funds can track negative sentiment related to a specific security or asset, or which sectors are signaling higher-than-expected vulnerabilities.
Through social media sentiment hedge funds can track how new risks may be emerging in different corners of the market, and how they can adjust their approach to mitigate such near-term problems more effectively. By using social media as a metric for risk management, hedge funds can assess various risks associated with a specific investment, company, asset or investor. In due course, hedge funds can adjust their portfolios to be more buoyant against a potential downturn.
Uncovering emerging market trends
New emerging market trends are influenced by a series of moving parts which influences the impact these new developments will have on the near and long-term sentiment of investors and hedge funds. In this case, it’s clear how social media acts as a soundboard for fund managers looking to uncover new emerging trends, and analyze the impact these developments might bring to the market and asset performance.
Using social media to uncover emerging trends does pose some risks, as it’s not possible to rely on speculative commentary on how market developments will influence price movements or help lay the foundation for what could become the next investment fad. Hedge funds need to understand their risks with leveraging social media for uncovering new trends, and consider how sentiment could likely change over the course of the trend lifecycle.
Mapping network connections
An analysis of network connections between investors, corporate management, market leaders and political players could help reveal patterns in behavior for hedge funds. By identifying these interactions, and seeking to discuss specific ideas openly on social media, fund managers could apply historical data to help construct the outcomes through predicting users' collective behaviour.
For ordinary users, outside of the scope of investing, social media plays an important role in seeking advice and feedback from online communities. In reality, one survey indicates that around 63 percent of people on social media consider community feedback an important or extremely important when seeking new recommendations on products and services. In the same survey, around 37% of 35-42 year olds and 34% of 43-58 year olds use social media to search for nearby businesses, services and products.
Additionally, this exercise could reveal whether investor sentiment is changing in light of current events, and what the initial reaction of this will have on security or asset performance. By mapping network connections, and uncovering patterns between users, hedge funds could possibly use this sentiment to help improve and deliver more constructive signals.
Monitor strategic behavior
Hedge funds understand the importance of having relevant and high-quality data available to help inform their decision making, and further support their near-term strategic developments. For these instances, it’s considered worthwhile to analyze how investors are changing their attitude or sentiment regarding specific investment signals.
For instance, fund managers could align both changing market conditions and social media sentiment to predict future outcomes, which in turn could influence how their strategies are being put together. By integrating social media data more effectively, hedge funds can track and analyze outcomes more clearly, while constructing more informative trading strategies.
Concluding Thoughts
Considering the importance of data and technical indicators in helping to construct more elaborate trading strategies, hedge funds should seek an appropriate perspective that would allow them to seamlessly integrate social media sentiment analysis into more fundamental decision-making. Through these efforts, hedge funds could likely uncover patterns that would help them mitigate risks, find new trends, and better understand how wider market sentiment could shift portfolio performance.
