Chaos reigns at new hedge fund

London-based hedge fund manager HED Capital Management is set to launch a new $200 million fund, dubbed the Beaufort Chaos Fund, by June. HED claims its chaos theory-based strategy obviates the need for derivatives.

The new long-short fund will trade US equities and attempt to identify trading opportunities on a universe of 2,000 stocks using chaos theory – the study of how apparently random-like behaviour arises in deterministic non-linear dynamics.

“When we initially looked at applying chaos theory, we thought we’d trade derivatives in addition to equities,” says Richard Edwards, London-based chief executive of HED Capital Management. But HED’s research showed it could get a significant edge over the market without using derivatives.

HED’s model was constructed after examining the price history of 3,500 stocks over the past 30 years. The initial step was to calculate and analyse Hurst exponents – key quantities in non-linear dynamics that quantify randomness – for the millions of data points generated.

Next, threshold points, where the market is about to topple into chaotic behaviour, were identified. “That’s the basis of our strategy - it tells us where to initiate positions,” Edwards said.

The fund will probably close at $200 million, and is aiming for an initial size of up to $50 million, Edwards said. HED has selected Goldman Sachs as its prime broker.

HED Capital Management was established in January 2002. The new fund is backed with seed capital by River & Mercantile, the asset management subsidiary of London-based private investment firm Pacific Investments.