Trading based on Twitter sentiment. Pour me a double!

Alright it happened yesterday, someone finally got drunk enough to start a hedge fund based on twitter sentiment. I love the article I linked because it says there is a connection between the twitter sentiment and the stock market, but no one understands what that relationship is, and in some sense it does not really matter. Really!?! Understanding relationships is the key, and is particularly important to preventing disaster if those two things ever become unlinked. For example, two cars follow each other on a road for many miles. We might then build a model that shows one car always follows the other. Later those cars get to an intersection and one turns left and one turns right. Model disaster! The same thing is the problem with social sentiment models. At R/finance 2011 Rothermich presented a paper where he built a trading model on sentiment from the dancability of the most popular songs in various cities. It worked great. Maybe he should set up a fund as well. Hey you may lose money, but at least you can dance to it.

Then I came across this great article that points out the potential for fraud in social networks and the effect on trading. Awesome article! We often forget how many people on twitter are not people at all,  but companies, PR firms, criminals and bots. Sentiment on Twitter can be and is managed in some cases.

This is a bad trading idea that is a great marketing idea. People will invest their money, and they will well compensate the administrators of the hedge funds as they lose money. I am just a small voice in the social media world drowned out by other sentiment. Besides there will never be an internet bust, derivatives are good for pension funds, housing will never collapse and yes Virginia there is a Santa Claus.