Investors explore social media
A look at why institutional investors have started using social media
Social media present a classic
chicken-and-egg dilemma: IROs want to be on Twitter and Facebook – but
only if investors are there, too.
And it’s notoriously difficult to determine how many institutional
investors are using social media outlets, and whether these new
outlets are just sources of entertainment or serious tools for making
No one knows the number of professional investors using social media
because most people are consumers rather than sharers, observes Joshua
Brown, vice president of investments at Fusion Analytics Investment
Partners and author of the Reformed Broker blog.
‘Almost everyone at a buy-side company or an independent of some
stripe is on Twitter,’ says Brown,
who has 23,000 Twitter followers of his own. ‘It doesn’t
mean they’re tweeting, but they are
Howard Lindzon, a former hedge fund
manager who’s now CEO of StockTwits, argues that many institutional
investors are ‘sneaking around at the office’, concealing their
reliance on social media because the tools are not yet mainstream.
Lindzon estimates that of StockTwits’ 200,000 users, 30 percent to 40
percent have day jobs as investors. In addition, he notes that most
StockTwits users are ‘hard core’, spending more than 30 minutes per
session on the site.
When asked about the prevalence of investors using social media,
Lindzon responds: ‘It’s everybody now, all the time. If they’re
blocked at the office, they’re going home and checking Facebook or
using their iPhone to check StockTwits.’
And he should know because it’s applications like StockTwits – a
that mirrors Twitter but exists on its
own platform – that are making the endless sea of noise
from social media more meaningful for investors.
Psychology of sentiment
Nowadays, news often breaks on Twitter before it hits traditional
outlets, says Robert Peck, president of CoRise Co, a digital
media-focused merchant bank. ‘If you see a lot of people on Twitter
talking very negatively about RIM shares, and then RIM shares start to
decline an hour later, you can see investors are harnessing the data
on StockTwits or Twitter,’ he says.
Most investors don’t use Twitter to determine which investments to
buy, but it can confirm (or quash) hunches. Peck notes that if throngs
of salespeople at a certain company are suddenly updating their
LinkedIn pages ‘it doesn’t mean the quarter is a disaster or they’re
going to lose their jobs, but it does give investors a reason
to start asking questions.’
For Brown, Twitter has supplanted traditional news sources. He no
longer has a Dow Jones or Reuters newswire subscription because he
feels his personally culled Twitter stream gives him superior
‘Big quant funds use social media the most,’ says Richard Peterson, a
psychiatrist and managing director of MarketPsych Data, based in Santa
Monica, California. Just how much is hard to know, he maintains,
because quants are so secretive.
Cracking China’s social media
Eric Jackson, founder of Ironfire Capital, a long/short and
corporate governance-focused investment firm, is a social media
darling in the US with 8,000 followers on Twitter. But in China,
where Jackson’s comments are translated into Chinese by
translation software, he’s arguably a superstar. On Sina Weibo, a
Chinese social media outlet that’s been described as a cross
between Twitter and Facebook, he has 17,000 followers. ‘For some
reason, I have a lot more followers on Sina Weibo than I have
here,’ Jackson says with bemusement.
He points out that Chinese social media are mirroring the US, with
Renren and Kaixin001 emerging as the Chinese doppelgangers for
Facebook. In China today, there’s even an equivalent of StockTwits.
Although Twitter is blocked in China, Sina Weibo exceeded 200 mn
registered users in the first quarter of 2012, with an average day
seeing more than 100 mn messages sent across the platform. By
contrast, Twitter has more than 140 mn active users as of 2012,
and generates more than 340 mn tweets daily.
The number of social media website users in China is impressive,
but growth could be hampered by politics. In April, Sina Weibo and
another popular micro-blogging service, Tencent, were blocked by
China’s government for allowing rumors to spread about a possible
coup attempt in Beijing that never materialized. This follows on
the heels of an edict from the Chinese government that all users
of micro-blogging sites must be registered in their real names – a
measure believed to be an attempt to curb rumor-mongering.
Derwent Capital, a London-based hedge
fund with a model that uses information gleaned from Twitter and
Facebook to make investment decisions, will soon make its platform
available to retail investors and traders who want to gauge collective
sentiment this way. Paul Hawtin, Derwent’s CEO and founder, says
investors accept that ‘fear and greed’ drive markets, but until now no
one has had the technology or data ‘to be able to quantify human
Social media, he believes, can do just that, so he’s convinced online
channels will play ‘an ever-increasing role within the investment
Some establishment investors are using social media, too, although
it’s still common practice to ban them from the workplace. In late
2011 Raymond James partnered with Actiance to let the firm’s financial
advisers use LinkedIn, Facebook and Twitter. The brokerage firm offers
training sessions to help newbies use social media properly, and
allows advisers to share their own ideas on these outlets (once the
messages have gone through a screening process).
Brown also praises Bill Gross and PIMCO for their Twitter feed and
split-second reactions to economic events. ‘That’s the second-largest
investment management company on the planet, and it’s on social media,
sharing ideas,’ he enthuses.
Social media – with multiple voices speaking freely – can be utter
chaos. What’s making it valuable for institutional investors is
start-ups creating ways to cut through the noise and extract value.
StockTwits did it by coding certain messages with a dollar sign.
Gnip, a provider of social media data for various enterprise
applications, is tailoring information for specific industries and has
created Gnip MarketStream for hedge funds and high-frequency traders,
according to Seth McGuire, director of asset management and financial
technology at Gnip. While investors have used social media for
everything from news analysis to equity research over the past few
years, McGuire says beginning in mid-2011 the primary adoption has
been as a trading indicator.
Meanwhile, Estimize is helping institutional investors reimagine one
of the coziest and hardest to penetrate corners of the investment
world: earnings estimates for public companies.
The IRO view
When it comes to social media’s use and value to IR, the jury is
most definitely still out among IROs. Dedicated smartphone/tablet
apps, an innovation more recent thansocial media, are viewed as
more productive, according to IR Insight, the research arm of
which conducts polls of the IR community.
Even among these groups, however, social media are not considered
that useful, being given a productivity score on a scale of one to
10 ranging between four and five, while smartphone apps score
between 6.8 and 7.8, and dedicated IR web pages score more than
Estimize’s chief executive and
co-founder Leigh Drogen, who was once a trader and hedge fund analyst,
has created an open-source repository for publishing earnings
estimates. Of the site’s 6,000 users, 17 percent identify themselves
as members of the buy side and 3 percent as members of the sell side.
‘We wanted to open up this data set, which is essentially a closed
data set owned by Thomson Reuters’ First Call,’ says Drogen. Estimize
finds its participants are beating the pros: for earnings estimates on
Estimize with four or more people weighing in, the Estimize numbers
were more accurate than the Wall Street consensus 64 percent of the
Here, too, curating information – or
separating the wheat from the chaff – is critical. Drogen lets
Estimize users contribute under a pseudonym as long as the pseudonym
stays the same. This means other users can check out the accuracy
scores of contributors before deciding whether or not to trust their
‘It leverages the community and says, What do you think the real
earnings numbers are?‘ Peck says of Estimize. ‘This is not just
the numbers the analysts put out there for the company to easily
Determining which investment voices to
trust remains a problem, even with a multitude of fixes emerging. Some
rely upon an individual’s follower count on Twitter; others look to
Klout scores, a system of measuring influence in the digital universe
by calculating factors such as how frequently an individual’s tweets
Whatever method is used, however, people like Brown would argue that
social media are a better source of information than reading the
financial press or watching CNN, where an editor or producer
determines which opinions get aired.
‘People who have a publicist get on television,’ explains Brown. ‘It
doesn’t mean they’re necessarily good or smart – or right. Social
media, on the other hand, really are a meritocracy.’
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