I was discussing social media analytics with one of my best friends, who is the CIO of a fund management / investment company. I had familiarized him with companies like Collective Intellect, and his response was both interesting and representative of reactions I’ve gotten from others in the investment and banking communities.

He found the technology interesting - but asked (I paraphrase):

“If their system really can be predictive of markets, even on a short-term basis, then why are they licensing it instead of just raising a fund and investing themselves?“

Every investment company I’ve ever dealt with had some proprietary “edge” which they claimed gave them a special insight and advantage for predicting market behavior. Such proprietary insights distinguished them from competitors, and were critical for attracting investors.

Their proprietary advantage might be based in people - specialized fund managers, economists, or scientists with special models and theories about currencies, commodities, industries, or other markets. Frequently the internal advantage is based on technology; advanced simulation or pattern-recognition systems using neural nets, genetic algorithms, or other advanced IT. There even has been a recent trend by hedge funds for recruiting “quants” such as mathmaticians and astrophysicists, who are distinguished in their ability to extract patterns from complext, huge, noisy datasets (see this nice little euromoney.com article for more discussion). Regardless, this seems to produce an attitude among investment companies that is very secretive and committed to their own proprietary technology while simultaneously being suspicious of others.

I’m not saying that financial-sector social media analytics such as those offered by Collective Intellect can’t find very successful markets and applications, but I wonder if the investment community might be most receptive to social media analytics as a “due diligence” tool. For example, before a given fund manager makes a major investment, social media analysis would be used as a “gut check” to look for unexpected trends, rumors and news in the social web that could never be predicted by their own internal technology.  In that context, social media analytics could be a small price to pay for the additional validation and risk avoidance.

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