Princeton Newport Partners
Thorp's hedge fund — one of the earliest and most successful quantitative funds, run for nearly two decades with a remarkably consistent track record.
In 1969, Thorp co-founded Princeton Newport Partners, widely regarded as one of the first quantitative hedge funds, applying his warrant/option arbitrage models and Kelly-based position sizing at institutional scale. The book describes the fund's remarkable track record — positive returns in nearly every year of its roughly two-decade existence, with notably lower volatility than the broader stock market, achieved specifically through market-neutral strategies designed to profit from pricing inefficiencies rather than from broad market direction.
Thorp describes building and continually refining the fund's computer models as markets evolved and as more sophisticated pricing (including the eventual publication of Black-Scholes) became widely available to competitors — a recurring theme being that a quantitative edge, once discovered, tends to erode as others adopt similar methods, requiring continuous refinement and the pursuit of new inefficiencies rather than resting on an edge that worked in the past, the same shrinking-edge dynamic this Book Club's When Genius Failed course describes happening to LTCM's convergence trades.
The fund also survived a real external shock — a 1981 FBI raid connected to unrelated conduct by a former limited partner, which produced years of legal proceedings but never implicated the fund's actual trading strategy. Thorp presents this episode less as a war story and more as an illustration that operational and legal risk are real, separate categories from market risk, and that a sound trading edge doesn't protect against every kind of threat to a fund.
Thorp frames the fund's achievement less around the absolute size of its returns and more around the combination of strong returns with unusually low volatility and drawdowns relative to the broader market — a direct, practical demonstration of the Kelly-based risk discipline from earlier in this course actually working at real institutional scale over a long period, not just in theory or in a single casino trip. This combination — strong long-run performance without the severe drawdowns that eventually destroyed a fund like LTCM — is presented as the direct payoff of decades of consistent position-sizing discipline rather than any single brilliant trade.
The 1981 raid is worth dwelling on because it illustrates a category of risk the Kelly framework from earlier chapters was never designed to address: Princeton Newport had, by every account in the book, a genuinely sound, rigorously risk-managed trading strategy, and still faced years of costly legal exposure over conduct unrelated to that strategy. Thorp's own response — full cooperation, keeping the fund's actual trading completely separate from the legal matter, and treating it as a distinct problem to be managed on its own terms rather than letting it distort trading decisions — is presented as an extension of the same compartmentalized, unemotional discipline that defined his position sizing.
- Princeton Newport Partners, founded 1969, was one of the earliest quantitative hedge funds, running market-neutral warrant/option arbitrage strategies.
- It delivered strong returns with notably low volatility across nearly two decades — a real-world, large-scale demonstration of Kelly-based risk discipline.
- A discovered quantitative edge tends to erode as competitors adopt similar methods, requiring continuous refinement rather than resting on past success.
- The fund survived a 1981 legal raid unrelated to its trading strategy — a reminder that legal and operational risk are separate categories from market risk.
- Keeping trading decisions insulated from an unrelated external crisis is itself a form of the same disciplined, unemotional approach behind Kelly sizing.