January 26th, 2021

Hitting the Ultimate Jackpot

Fortune's Formula Pt. 4: From Blackjack to the Largest Trade in NYSE History

This is the 4th and final post in our 4-part series on Edward Thorp, a man who changed the games of blackjack and investing. Looking to catch up on the series? Check out the the previous posts here:

Part 1: What Happens in Vegas, Stays in Vegas

Part 2: Meet Me at the Blackjack Table

Part 3: To Beat the Market, You Must Have and Edge


“The sad fact is, almost everyone who gambles goes broke in the long run.” – William Poundstone, Fortune’s Formula

Blackjack had ceased to be as profitable or fun as it had once been for Ed Thorp.

Thorp made about $25,000 playing blackjack, but abandoned cards in favor of the stock market. He read all he could about the markets and became interested in warrants, which are specialized instruments somewhat like options. Investors buy and sell warrants, which gain or lose value depending on the price of the underlying stock.

In 1964, Thorp was working at the University of California at Irvine, where he teamed up with economist Dean Kassouf who also followed warrants. By 1967, Thorp had turned his $40,000 trading account into $100,000. That year, Kassouf and Thorp wrote a book about their warrant trading system. Beat the Market included the first description of the “delta neutral” hedging system.

Delta neutral is a portfolio strategy that utilizes multiple positions with balancing positive and negative deltas so the overall delta of the assets totals zero. A delta-neutral portfolio evens out the response to market movements for a certain range to bring the net change of the position to zero. Options traders use delta-neutral strategies to profit from either implied volatility or time decay of options.

A former Philadelphia stockbroker, James Regan, asked Thorp to join a hedge fund as a mathematical theoretician. Regan planned to create the fund, raise the money, and manage the partnership. It would be called Convertible Hedge Associates after the convertible bonds it would trade. The fund was launched in 1969, and gained 13% in 1970, compared to a 3.2% gain in the S&P 500 Index. By 1971, it returned 26.6%, twice the S&P. In 1974, it was renamed Princeton-Newport Partners.

By 1982, Thorp and Regan’s fund had successfully exploited arbitrage opportunities in the S&P 500 Index futures. In the course of taking a large position in the dissolution of AT&T (when the U.S. Justice Department broke it into seven regional “Baby Bell” companies), Princeton-Newport executed the largest trade in New York Stock Exchange history.

While Warren Buffett and George Soros’ hedge funds beat it slightly, their funds were more volatile. Many consider the Thorp-Regan fund the most successful investment partnership in history. Over 19 years, Princeton-Newport Partners posted a compound annual return averaging 15% after fees, about twice the S&P 500’s earnings over the same period. That's quite the jackpot, isn't it? Edward Thorpe
TagsGamblingInvesting Princeton-NewportNYSES&P500edward thorpJames Regandelta-neutralFortune's Formula