Beat the Dealer, Subprime, etc.

Great interview/discussion in today’s WSJ with Bill Gross of Pimco, and Edward Thorp of Beat the Dealer and Princeton-Newport Partners fame. Here is an excerpt:

WSJ: What’s your assessment of the state of hedge funds today?

Mr. Thorp: In the last 15 years or so, there has been a large flow of capital into the hedge-fund world, from $100 billion in the early 1990s to $2 trillion now. But the amount of available investing opportunities hasn’t increased that much. That has led to the over-betting phenomenon Bill and I were talking about, or gambler’s ruin.

Hedge funds started using a great deal of leverage to increase returns. But you can get wiped out if you bet too aggressively. A classic example is Long-Term Capital Management [the huge hedge fund that blew up in 1998]. We’ll probably be seeing more of that now.

Mr. Gross: It’s true that the available edge has been diminished, and that led to increased leverage to maintain the same returns. It’s the leverage, the over-betting, that leads to the big unwind. Stability leads to instability, and here we are. The supposed stability deceived people.

Mr. Thorp: Any good investment, sufficiently leveraged, can lead to ruin.

Read the whole thing. A nice job by Scott Patterson at the Journal.


  1. Trouser Chili says:

    yeh let’s listen to Gross, Mr. CDS has triggered the apocalypse (but ignore the fact that there’s $500 mln of CDS in my pimpco total return fund), Mr. PIMPCO has 0 exposure to subprime (even though we manage billions in CDOs backed by crap ABS deals). The guy’s a total joke and those who haven’t realized it yet are lazy rubes who stroke themselves to CNBC all day long.
    Doesn’t Thorp have some more illicit tax schemes to construct? his stat arb models no workie so now its lecture time, i see-