Monday, January 10, 2011

Measuring Crowded Investment Strategies with Online Media

Recently at Recorded Future, we have been experimenting with applying our sentiment scoring methodology to measuring the level of other concepts communicated in web content. Some ideas we have have been playing with include deceit, fear, and uncertainty. Outside of emotive language, we have also looked at capturing the level of chatter around a particular technology or business construct.

In particular, we recently developed a score to monitor the level of chatter around the concept of “momentum investing,” an investment style that has been in and out of favor with the media and the market over the years. We then applied this scored to our content and plotted the results over time. As a comparison, we look at the performance of the Monetta Fund (MONTX) a Mutual Fund that follows a momentum investment strategy.

Our theory, before seeing these results was that we would see a positive correlation between the performance of a momentum investing strategy and discussion about it online. However, as you can see in the chart above, the two metrics are generally inversely correlated for the time period in question. For 2010, the correlation of monthly changes in the metrics was -0.56. As chatter around momentum investing declines, the $NAV/share of the fund rises, and vice-versa. This finding makes economic sense, if you look at the market from in an ecological framework. To quote David Merkel of, “Many strategies are competing for scarce returns. Often the best strategy is the one that has few following it, and the worst one is the crowded trade.” Is there a suitable proxy for the “crowded trade” based on online chatter? Stay tuned for more research in this space.

1 comment:

  1. Many thanks to you for sharing this information.You explained every point very well.
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