It’s not quite an index, but you know financial blogging has come of age when a data provider starts to incorporate it as one of its services to institutional investors. The firm is Alacra and among its clients are hedge funds According to Tim Human at the Cross Border Group, which publishes Investor Relations magazine, “Hedge funds are testing out a data feed produced by monitoring a group of financial commentators that includes bloggers. The trial is still at an early stage, but it shows how seriously the investment community is taking the opinions of those working outside traditional media outlets.”
Now who would those bloggers be? Some are fairly well-known names in the blogosphere, including, Barry Ritholtz, Henry Blodget, Felix Salmon and Paul Kedrosky. But how would they help, given that their comments – often off the cuff in quickly changing markets – are published multiple times every day?
“Hedge funds are taking that feed, mixing it with other data, and using the combination to try to create successful algorithmic trading strategies,” Human reports. “So far, the data suggest stock prices outperform when sentiment at a given company has been positive for a number of weeks.”
What Alacra is doing, says the Wall Street Journal, is trying to reduce the noise. “First, it only looks at blogs the company deems credible. The blogs are combined with articles from traditional media companies for a total of about 3,000 sources. Rather than trying to codify all the text within each source, it focuses on specific items such as quotes from well-reputed Street analysts and C-level executives. Sentiment ratings are assigned based on the language used.”
Through backtesting, Alacra has found the ratings generated by its product can lead movements in stock prices by about one to three weeks for large-capitalization stocks. In turn, hedge funds and proprietary traders are interested in the feed despite that it won’t work anywhere near the lightning-fast speeds they’ve been achieving for much of their other computer-based trading.” High-frequency trading certainly deserves high-frequency information – but with a little bit of human qualitative culling it, of necessity, will lag the lightning speed of the market.