Derwent Capital Markets, a family-owned hedge fund, will offer investors the chance to use Twitter posts to gauge the mood of the stock market, co-owner Paul Hawtin says.

The Derwent Absolute Return Fund Ltd., set to start trading in February with an initial $39 million under management, will follow posts on the San Francisco website. A trading model will highlight when the number of times words on Twitter such as ‘calm’ rise above or below average.

A paper by the University of Manchester and Indiana University published in October said the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones industrial average. A change in emotions expressed online would be followed two to six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6 percent accuracy.

‘Sentiment and mood dramatically change the impact of positive and negative news stories,’ said Hawtin in a telephone interview. ‘If the market’s in a very positive and bullish mood, it can shrug off bad news – bad news comes out and you expect the Dow to fall, and it doesn’t.’

Twitter now has 175 million users and sees 95 […]