Hedge Fund Market Wizard Ed Thorp
Jack Schwager recently released his new book Hedge Fund Market Wizards an excellent series of interviews with some of the worlds greatest hedge fund managers. If you haven’t yet read the book, we seriously recommend getting hold of a copy through Amazon.
One interview that stands out above the rest in our opinion is that with Ed Thorp. Thorp ran the hedge fund ‘Princeton Newport Partners’ for 19 years and racked up a compound annual return of 19.1 percent consisting of an incredible 227 winning months and just 3 losing months (all under 1 percent).
Below we summarize some of the key insights from Schwager’s interview with Ed Thorp:
- Thorp approached the markets as a probability based game where the problem of finding an edge can be solved analytically through scientific thinking and mathematical reasoning.
- Varying position size can be as important as entry and exit methodology. Trading smaller on low probability events, and larger on high probability events makes a huge impact on returns. Thorp also highlighted the importance of keeping bet size within a traders comfort levels.
- Thorp employed trend following strategies, however he only bet a small percentage of what Kelly would suggest to be ‘optimal’ position sizing on this strategy.
- When a strategy starts to lose its edge, it is necessary to adapt the strategy or find a new edge to maintain risk adjusted returns. Markets change.
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