Ed Thorp is a legend in the Hedge Fund / Managed Futures / Global Macro space, but it’s not every day he gets the spotlight in today’s Dow 20,000 meme filled clutter that is financial blogging. That changed recently, however, when one of the bloggers for Ritholtz Wealth Management (Michael Batnick) outlined Thorp’s backstory and track record.
In the decade after Ed Thorp launched Princeton Newport Partners, the fund gained 409%, annualizing at 17.7% before fees and 14.1% after. Not bad for a market neutral portfolio. Over the same period, the S&P 500 annualized at just 4.6%, including dividends. When Thorp was running his strategy, his competition was, well, there really wasn’t any. He described what he was doing as “like firearms versus bows and arrows.
The models his computers ran were so far ahead of their time that in his twenty years at the helm, they didn’t have a single losing quarter.”
We’ll throw out a hefty past performance is not necessarily indicative of future results, for that track record. And surely, that’s most of the point of Batnick’s piece. Ignoring the no losing quarters part for a second, we couldn’t help but see that 409% total return for Thorp over time and think, “hey, we know some programs with records as good.” A quick sort on our new database tool gave us a few dozen such managers. Here are five that we chose to highlight, having been trading longer than some millennials have been alive.
|Managers||Compound ROR||Total Return||Max Drawdown||Inception Date|
|EMC Capital Advisors - Classic (QEP)||+18.25%||21,235%||-45.16%||01/1985|
|Crabel Capital Management - Diversified Futures 4X (QEP)||+17.50%||5,530%||-26.65%||01/1992|
|Abraham Trading Company (QEP)||+15.62%||6,622%||-31.96%||01/1988|
|Quest - Alpha Quest Original (QEP)||+12.16%||659%||-24.60%||05/1999|
|Chesapeake Capital Corp. - Diversified (QEP)||+11.37%||2,153%||-31.57%||02/1988|
(Disclaimer: Past performance is not necessarily indicative of future results)
If you want to do your own search of managers with certain track records – register for our database to customize your search amongst hundreds of programs.
To be clear, there are probably thousands of programs that have opened and closed in the time these managers took to produce double digit compound rates of return. These are definitely the outliers. The success stories, just as Ed Thorp was an outlier. Now, maybe Thorp did it with less risk; these drawdowns are definitely on the higher side and nobody here is able to claim no losing quarters. But he also did it with less money than some of these and for a shorter time period. The longer you trade, the more apt you are to run into a poor environment/streak of bad luck/etc. , and some of these are going on 30 years.
Back to Michael Batnick – not only does he highlight that these sort of strategies shouldn’t be compared to the S&P 500 – something we’ve talked about here – but argues that these alternative strategies should be viewed as an “insurance” or what we consider to be “crisis period performance.”
If 90% of your money is in traditional risk assets, view the 10% in alternatives as insurance, as something which you expect to be a cost most years. But make sure that you or your committee deeply understands the strategy, so that you’re not constantly assessing their viability every quarter.”
Now, many managers don’t like to be called insurance and don’t think investors should allocate to them in that way. But all of them would agree to that second part, about not assessing their viability every quarter. If thinking of them as insurance helps you stick through losing periods and not knee jerk allocate at each spike up or grind down, by all means, go ahead.
Bottom line: there’s more “legends” like Ed Thorp out there (although they’re more machine, than man, these days, to paraphrase Obi Wan Kenobi). But you won’t get to these types of multi-decade compounded returns if performance chasing and dropping managers at the first sight of trouble. The legend status only comes to those with a deep ability to stay the course, both in terms of the managers and the investors. Ready to find your Thorp, start your search.