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 investment decisions.

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 listening.’

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 service 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 intelligence.

‘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.

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 emotion.’

Social media, he believes, can do just that, so he’s convinced online channels will play ‘an ever-increasing role within the investment community.’

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.

Curating information

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.

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 time.

Anonymous donors

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 analysis.

‘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 beat.’

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 are retweeted.

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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