Trading on a World of Sentiment
Investors are consulting software that analyzes millions of online comments about companies to help them decide when to buy – and sell – stocks.
Dr. Richard Peterson, a psychiatrist by training, knows firsthand that emotions often rule investors. After the financial crash of 2008, he invested in stocks such as Citigroup (C), when others were selling. His now-closed MarketPsy LongShort Fund went on to outperform the Standard & Poor’s 500- stock index from September 2008 through the end of last year. „In the end, 75 percent of the overall strategy was based on sentiment,“ says Peterson, managing partner of the fund’s parent MarketPsych Capital. The fund, which began with $1 million, had a 28 percent return from Sept. 2, 2008, through Dec. 31, 2010. The S&P 500 lost 1.6 percent over the same period. Peterson was able to do this by using software that his company developed over seven years that looks at online financial news, financial social media, and corporate interviews. It quantifies 400 types of sentiments and topics from optimism and anger and management changes or product releases for 6,000 U.S. stocks and exchange-traded funds. He now sells that software to hedge funds and other financial firms.
Institutions Appreciate Fast Insights
MarketPsych faces competition from other companies that sell software and services to monitor sentiment about stocks on the Web, including Ravenpack, Thomson Reuters (TRI), and Bloomberg Businessweek’s parent company, Bloomberg LP. RavenPack’s business has quadrupled in the past year, and includes some of the world’s top hedge funds, says Chief Executive Officer Armando Gonzalez, who declines to name any customers. „The institutional clients are starting to understand the value of news and having it faster than anybody else to detect the things you don’t expect,“ he says. Gonzalez predicts the market will grow „significantly“ in the next five years.