Algorithmic trading is old news, and the high speed frenzy was overdone in 2014. The big evolution in hedge funds in 2015 is going to be social trading and Tashtego, a hedge fund based in Boston, is leading the charge. The company is creating a strategy that will use tracking of social networks at its heart and trade equities based on the information it gleans.
The new fund is looking for around $1 billion in capital to start its investment. It’s already backed by Spark Capital, the venture capital firm that bought into Twitter early in its lifetime and also invests in eToro, one of the world’s premiere social trading platforms. The Tashtego project brings those ideas together in an interesting, if esoteric, package.
Betting on sentiment with Tashtego
Tashtego is going to trawl social networks like Twitter and Facebook, collecting information about how customers and investors see different companies. Combining that information with other data and valuation techniques, the algorithm will trade equities in an attempt to secure absolute returns for its clients.
This isn’t the first outing for the firm. In 2013 Tashtego launched a hedge fund designed to invest in currencies, leveraging the massive amount of information on individual currency trading available across the internet. Now that social trading has become a massive well of data, the equity markets are the next major opportunity.
The Social Equities Fund will be both long and short US equities. Information from Twitter has been used to trade the equity markets since the network exploded in popularity. StockTwits, one of the most well known social trading platforms, grew out of Twitter, and news that reaches the network before other platforms is often used to make quick trades.
The false reporting of the assassination of Barack Obama in 2013, caused by infiltration of an Associate Press Twitter account, caused the instantaneous loss of about $130 billion off of the S&P 500. The information as quickly revealed to be fake, and the market returned to normal, but the incident shows one downside to relying on private third parties for information collection and aggregation.
Tahstego seeks social guidance
Tashtego was the ship companion of Ishmael in Herman Melvilles’ seminal novel Moby Dick. The Native American harpooner is the first to spot the White Whale at the end of the novel, a scene not lost on the founders of the hedge funds as they seek to profit off of recognizing trends before anyone else.
Arthur Mateos, the Tashtego Chief Investment Officer was once an experimental nuclear physicist at the Massachusetts Institute of Technology. His firm will attempt to draw conclusions from the massive streams of data emanated by social networks every day of the year.
The wisdom of the crowd has been utilized by several web startups in an attempt to make use of the Big Data supplied by social networks and other internet platforms. No investment house has yet publicly claimed a great win in utilizing these methods, but several are pouring talent and money into ventures designed to do just that.
Tashtego, if it manages to get anywhere close to that $1 billion target and actually concentrates on using social information to inform its investments, will be the first to have real success in the area.
Setting out from Spark Capital
Tashtego is largely a construction of Spark Capital, which put the team together five years ago in order to turn social information into actionable investment advice. The currency trading platform was the first foray into that market, and the Social Equities Fund is the second. Reaching for a $1 billion investment means that the fund is no longer experimental, this is a serious attempt to use Twitter to figure out stock market returns.
This isn’t Spark Capital’s only foray into the world of social trading. The $2 billion venture capital firm was an early backer of eToro and also has investments in FundersClub, a crowdfunding platform and Covestor, an online investment hub.
Spark is widely invested in several companies that seek to use web technologies in order to change the financial world. The company, which currently owns a majority stake in Tashtego, is also an investor in the company’s funds. The extent of those investments were not revealed in the SEC filing, however.
Paul Shea is an experienced money, trading and investing writer who cut his teeth writing stock, investment and industry analysis and covering macroeconomics. Paul Shea work has been linked and quoted by MSNBC, BusinessWeek, Barrons, Zerohedge and The Blaze, and his work appears regularly on Google News and Google Finance, as well as other prominent news aggregators. He’s also written about the tech industry for the likes of Valuewalk and The Street. Paul is a senior contributor writer for TradersDNA and HedgeThink.