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Perhaps it's not surprising that the worlds of literature and hedge funds are colliding. But no one would have predicted the other elements of this tale: angry investors, regulators, even the principles of astrophysics.
Our stranger-than-fiction story starts in the late 1980s, when Robert Taylor, then a construction executive and amateur scientist, began formulating a theory that fluctuations in the earth's gravity influence investors. Over the years, he refined the idea, which he calls the Taylor Effect, into a stock market trading strategy.
In March, Taylor, 59, revealed his system to the world in a mystery novel called Paradigm; think The Da Vinci Code for the Wall Street set. It has all the hallmarks of a great summer read. The protagonists crack the secret of the stock market, a dangerous discovery that threatens their lives. It's Taylor's second book; his first was OPStime, a 1994 nonfiction work on human behavior.
Taylor, who sold his construction outfit in 1999, insists his offbeat trading strategy works. When the earth's gravitational pull (as measured by tidal patterns) is at its weakest, he says, the stock market reaches a high, as happened in 2000. The converse is also true, he says: When the earth's gravitational pull becomes stronger, stocks plummet, as in 1987. "I bring the subject matter down to the street level in the book," says Taylor. "But the characters go through the same methodology, the thought processes, the strategies that I did. Except that they're taller, darker, and have a lot more hair."
Here's how Taylor's system can be applied. If the model says, for instance, that the Standard & Poor's 500-stock index is headed up, you buy an exchange-traded fund (ETF) that tracks that index. If the market looks like it's going down, you maintain that position but also sell futures of the S&P 500 to hedge your bet. You take the profits from those futures and reinvest them in the ETF when the model says the market has reached bottom. In layman's terms, it's a long-term strategy that predicts market dips before they happen and buys on them.
Taylor says he invests his own money this way and has booked more than $1 million in profits since 2000. He claims he outpaced the S&P by 40% over the past five years but concedes that he experienced some losses over the course of developing the strategy.
In 2002, Taylor licensed a trading technology based on his model to Ty Edwards and a partner, who were starting the Georgia-based Aurora Investment Fund, a hedge fund. After a series of dramatic turns, Edwards was charged in October, 2005, with fraud by the Commodity Futures Trading Commission (CFTC). The regulator alleges that Edwards, who raised the bulk of the $25 million for the fund firm (the partner appears to have left by the middle of 2004 and isn't implicated), misled prospective investors by telling them the group managed up to $100 million and that it generated profits without a single losing month.
Edwards' attorney, Lawrence A. Rosenbluth, acknowledges that there were losses but blames them on a third-party clearinghouse that didn't follow Edwards' trading instructions. The case is in the discovery phase before a U.S. District Court in Georgia.
Taylor says he pulled out of the Aurora pact after learning that Edwards wasn't following his strategy properly. (He isn't implicated in the CFTC action.) Given his literary bent, the experience could be fodder for a Paradigm sequel. By Adrienne Carter