This week wasn’t only about the IPO of LinkedIn and people fearing another dotcom bubble. It was also about Derwent Capital getting the green light for its social media based hedge fund from the FSA, the regulator of financial services in the UK. A first of its kind, the fund will monitor threads on Twitter to feel out marketing sentiment before placing its bets.

Another good example of a financial business ‘going social’ is CMC Markets, which is looking to soon release “a Facebook for traders”. This will be a trading application with the aim of building trading communities as a forum to discuss trading strategies. CMC feels that this platform could be particularly beneficial to new traders, who will be able to plug into a large community of traders. This isn’t a completely original idea though: platforms like Covestor already provide their user communities with easy access to professional investors, whose investments they can mirror.

These are the main things I learned from these social moves by financial institutions:

1. This is quite a drastic break from traditional investment methods – Even though I don’t think for a minute that complicated financial models are going to disappear, these moves show that public sentiment (Twitter) and easily accessible expertise (CMC, Covestor) are credible investment resources for investors to dip into.
2. Increase use of social media to make trading decisions – There is a trend involving a growing number of people referring to social media or expert communities for advice on their trading decisions.
3. Social media provide a handy format! – Twitter and Facebook are in a way geared towards providing users with bite-size snippets of useful investments. This is an area where the more traditional investment methods are definitely lacking

Main learning point: it’s fair to say that the financial world has discovered the potential business opportunities that social media has to offer. Community based trading platforms I can see working (and are clearly proving to be a success) because they enable traders to get access to expertise they would otherwise have to pay substantial fees for. Using Twitter and Facebook to predict market sentiment, however, I’m less sure of. Isn’t it risky to use, often fickle and impulsive, Twitter and Facebook sentiments as a starting point for financial investments?

Related links for further learning:

http://www.theatlantic.com/business/archive/2011/05/the-worlds-first-twitter-based-hedge-fund-is-finally-open-for-business/239097/

http://www.ft.com/cms/s/0/fd34524a-782c-11e0-b90e-00144feabdc0.html#axzz1N1V6MwPe

http://www.blogs6.com/2011/03/social-media-an-increasingly-valuable-resource-for-share-traders/