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.