I have great respect for Ed Thorp. He has a multi-decade track record of making 20%+ returns with essentially zero market correlation. He doesn't toot his own horn much, so it takes some digging to find this out. But he did this by making short term arbitrage-type bets on 1000's of stocks at a time, aided by his "Omnivore" computer program.
(Source: Investing Message Board, March 23, 2008)
Thursday, June 26, 2008
Wednesday, June 25, 2008
Ed Thorp Wikipedia Page
Ed Thorp's Wikipedia page:
http://en.wikipedia.org/wiki/Edward_O._Thorp
"Since the late 1960s Thorp has used his knowledge of probability and statistics in the stock market by discovering and exploiting a number of pricing anomalies in the securites markets, and he has made a significant fortune. Princeton Newport Partners was Thorp's first hedge fund, achieving an annualized net return of 15.1 percent over 19 years. In May 1998 Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years."
http://en.wikipedia.org/wiki/Edward_O._Thorp
"Since the late 1960s Thorp has used his knowledge of probability and statistics in the stock market by discovering and exploiting a number of pricing anomalies in the securites markets, and he has made a significant fortune. Princeton Newport Partners was Thorp's first hedge fund, achieving an annualized net return of 15.1 percent over 19 years. In May 1998 Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years."
Edward O. Thorp Website
Dr. Thorp apparently has a website where people can get access to his papers:
http://www.EdwardOThorp.com
http://www.EdwardOThorp.com
Tuesday, June 24, 2008
Edward O. Thorp: Founding Father of Quantitative Hedge Funds
"I've been an active participant in the hedge fund world since starting Convertible Hedge Associates in 1969 (we changed the name to Princeton Newport Partners in 1974). At that time there were only a couple hundred hedge funds, and ours was (1) the first market neutral fund, (2) the first quantitative fund, (3) the first derivatives hedging fund."
(Source: Wilmott Magazine, 2007 // http://www.wilmott.com/)
(Source: Wilmott Magazine, 2007 // http://www.wilmott.com/)
Ed Thorp & Paul Newman
"In the early 1970s, Thorp got a lead that actor Paul Newman might be interested in investing [in Thorp's hedge fund]. Newman had just done The Sting. Thorp had a beer with Newman on the Twentieth Century Fox lot. Newman asked how much Thorp could make at blackjack if he did it full-time. Thorp answered $300,000 a year.
"Why aren't you out there doing it?" Newman asked.
"Would you do it?" Thorp asked.
Thorp estimated that Newman made about $6 million that year.
Thorp was making about the same."
(Source: Fortune's Formula (Hill and Wang, 2005), Author: William Poundstone)
"Why aren't you out there doing it?" Newman asked.
"Would you do it?" Thorp asked.
Thorp estimated that Newman made about $6 million that year.
Thorp was making about the same."
(Source: Fortune's Formula (Hill and Wang, 2005), Author: William Poundstone)
Evidence Suggests Ed Thorp Discovered The Black-Scholes Model Years Before The Nobel Prize Winners
"Edward O. Thorp has made a tremendous career from finding opportunities and properly exploiting them as advertised in this ground breaking book.
There is no one in the financial world who has had a better risk-adjusted return than Thorp for the last 30 years.
Virtually unknown is the fact that years before [Fischer Black & Myron Scholes], Thorp invented/discovered the formula that is attributed to Black-Scholes [that won them the Nobel Prize], with the exception of the risk-free interest rate factor, because of existing market structure that prevented interest from being a factor.
And Thorp's treatment of the Kelly Criterion makes this a standout work. Since many have never read this book yet or tried to apply the principles that Thorp revealed in this book, it would be easy to dismiss this as some worn-out idea that has come and gone. Far from it. There is a reason that the few copies that were printed are still in demand. The old saying is that those who can, do - while those who can't, teach. Thorp proved that he was the former."
(Source: Amazon.com book review, -"J.R.", March 23, 2007)
There is no one in the financial world who has had a better risk-adjusted return than Thorp for the last 30 years.
Virtually unknown is the fact that years before [Fischer Black & Myron Scholes], Thorp invented/discovered the formula that is attributed to Black-Scholes [that won them the Nobel Prize], with the exception of the risk-free interest rate factor, because of existing market structure that prevented interest from being a factor.
And Thorp's treatment of the Kelly Criterion makes this a standout work. Since many have never read this book yet or tried to apply the principles that Thorp revealed in this book, it would be easy to dismiss this as some worn-out idea that has come and gone. Far from it. There is a reason that the few copies that were printed are still in demand. The old saying is that those who can, do - while those who can't, teach. Thorp proved that he was the former."
(Source: Amazon.com book review, -"J.R.", March 23, 2007)
Edward Thorp, The Black-Scholes Model, & The Nobel Prize
"Another games player who switched to finance early was Ed Thorp, the mathematics professor who invented blackjack card counting. In 1961, he wrote Beat the Dealer about how he won in casinos. Less well known his his 1967 book, Beat the Market (with Sheen Kassouf). Ed did not wait for public options trading in1973; he began buying and selling warrants (options issued directly by corporations rather than by created exchanges) in the 1960s. He applied the same principles of careful mathematics and controlled risk taking to the market as he had to blackjack and has compiled an unequaled 40-year track record of high-return, low-risk investing.
In coming up with a trading strategy for warrants, Ed discovered a handy formula. A few years later, three finance professors independently came up with their own slight mathematical variant of the same formula. Ed Thorp, Myron Scholes, Robert Merton, and Fischer Black all had almost the same formula, but each had a different reason for believing it was true. Ed showed that it was a way to make money, Scholes that it was required for market efficiency, Merton that it had to be true or there would be arbitrage, and Black that it was required for market equilibrium. Black's insight turned out to be the most important, although it would take him 20 more years to work out its full implications. Merton and Scholes shared a Nobel Prize for their work; Black died by that time or he certainly would have been included. Thorp missed out on the Nobel, be he got rich using the formula, while Merton and Scholes had disastrous personal financial results. Black's dislike of risk kept him from either extreme.
...All four of these guys are extraordinary geniuses. Some people think Black was the smartest, but I suspect that's because he fit the anti-social, half-crazy popular image of a genius. Ed's the most fun to have dinner with, Scholes in the best lecturer, and Merton's best if you want to sit down and work out some math."
(Source: The Poker Face of Wall Street (Wiley 2006), Author: Aaron Brown)
In coming up with a trading strategy for warrants, Ed discovered a handy formula. A few years later, three finance professors independently came up with their own slight mathematical variant of the same formula. Ed Thorp, Myron Scholes, Robert Merton, and Fischer Black all had almost the same formula, but each had a different reason for believing it was true. Ed showed that it was a way to make money, Scholes that it was required for market efficiency, Merton that it had to be true or there would be arbitrage, and Black that it was required for market equilibrium. Black's insight turned out to be the most important, although it would take him 20 more years to work out its full implications. Merton and Scholes shared a Nobel Prize for their work; Black died by that time or he certainly would have been included. Thorp missed out on the Nobel, be he got rich using the formula, while Merton and Scholes had disastrous personal financial results. Black's dislike of risk kept him from either extreme.
...All four of these guys are extraordinary geniuses. Some people think Black was the smartest, but I suspect that's because he fit the anti-social, half-crazy popular image of a genius. Ed's the most fun to have dinner with, Scholes in the best lecturer, and Merton's best if you want to sit down and work out some math."
(Source: The Poker Face of Wall Street (Wiley 2006), Author: Aaron Brown)
Friday, June 20, 2008
Edward Thorp
Dr Edward O. Thorp, the phenomenal mathematical talent from the United States, has a resume that reads like something out of a movie. Thorp has taken both the gambling and investment communities by storm. In 1949, Thorp conceived of a system to beat roulette by physical prediction and went on to invent (with Claude Shannon) the first wearable computer to successfully predict roulette outcomes in Las Vegas.
Ed Thorp is best-known for being the genius who devised a system to beat the game of Blackjack. His card counting strategy was outlined in his 1962 best-selling book (and still in print) book, Beat the Dealer. Several experts have acknowledged that Beat the Dealer single-handedly changed the future of Las Vegas. The book has sold over 600,000 copies, and thrust Edward O. Thorp into the public limelight.
Moving to the world of investment, Thorp formulated (with Sheen Kassouf) the concept of delta hedging - a key step towards Black-Scholes. Using intuitive and plausibility arguments he guessed and applied what would later come to be called the Black-Scholes formulae, in the correct risk-neutral form, to make himself a fortune in the stock market from 1967 onward.
He then founded (in 1969 with Jay Regan) the first market-neutral derivatives-based hedge fund, Princeton-Newport Partners, that produced a legendary track record. Amongst others, he ran the statistical arbitrage based Ridgeline Partners (1992-2002).
Thorp’s investment pools have shown a profit during each of the 42 years between 1966 and 2003 with annualised returns to investors averaging 15% to 20%, depending on the entity.
Ed Thorp is best-known for being the genius who devised a system to beat the game of Blackjack. His card counting strategy was outlined in his 1962 best-selling book (and still in print) book, Beat the Dealer. Several experts have acknowledged that Beat the Dealer single-handedly changed the future of Las Vegas. The book has sold over 600,000 copies, and thrust Edward O. Thorp into the public limelight.
Moving to the world of investment, Thorp formulated (with Sheen Kassouf) the concept of delta hedging - a key step towards Black-Scholes. Using intuitive and plausibility arguments he guessed and applied what would later come to be called the Black-Scholes formulae, in the correct risk-neutral form, to make himself a fortune in the stock market from 1967 onward.
He then founded (in 1969 with Jay Regan) the first market-neutral derivatives-based hedge fund, Princeton-Newport Partners, that produced a legendary track record. Amongst others, he ran the statistical arbitrage based Ridgeline Partners (1992-2002).
Thorp’s investment pools have shown a profit during each of the 42 years between 1966 and 2003 with annualised returns to investors averaging 15% to 20%, depending on the entity.
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