Hack the market

The always excellent Wilmott Magazine has recently posted a series of articles by Ed Thorp (pictured) in which he describes his experiences developing and evolving a statistical arbitrage product. Part I provides some insights into his current operation, revealing that he maintains a dollar-neutral portfolio as I’d discussed in another post, they trade some 1.5 billion shares / year, and that they limit position sizes to 2.5% on the long side of the portfolio and 1.5% on the short side. In Part II, he explains why a stat arb system is considered an “arbitrage” and how, with the help of a talented team and led by the insights of Gerry Bamberger, they developed the first iteration of a stat arb product. Part III details the evolution of the system from a set of dollar-neutral sector-oriented portfolios to the more general sets of portfolios generated through statistical factor analysis. He concludes with some anecdotes including the emergence of David E Shaw. Very recommended.