Trading & Options · Profile from Trading and Options Research Companion
Princeton Newport Partners
The hedge fund that the mathematician Edward O. Thorp and the Princeton-trained investor James "Jay" Regan started in November 1969 as Convertible Hedge Associates — widely described, including by Thorp, as the first market-neutral quantitative hedge fund. It hedged warrants, convertibles and options against their stock with pricing models Thorp built before Black–Scholes was published, later ran early statistical arbitrage, and reported ~19.1% a year gross and ~15.1% net of fees from November 1969 to December 1988 with only three losing months (secondary sources citing Thorp; other accounts give 18.2% or ~20% net). Assets grew from $1.4m (1969) to $273m (end-1987) (Princeton Info, 2017). It was destroyed not by a trade but by the law: a 17 Dec 1987 raid, an Aug 1988 racketeering (RICO) indictment of five Princeton-office executives over tax trades and stock "parking" tied to Drexel Burnham Lambert, convictions on 31 Jul 1989, and appellate reversal of the key counts in 1991. Thorp was never charged. For a trading book it is the founding case of delta hedging as a business — and of an edge lost to an event outside the model. Fewer documented decisions exist than for a modern fund, so this profile has seven moves (rule 6).
At a glance
- Founded
- November 1969 as Convertible Hedge Associates by Edward O. Thorp and Jay Regan; renamed Princeton/Newport Partners in 1974 (Wikipedia; Princeton Info, 14 Jun 2017)
- Founders
- Edward O. Thorp (b. 14 Aug 1932; PhD UCLA 1958; author of Beat the Dealer, 1962, and, with Sheen Kassouf, Beat the Market, 1967) ran research and trading from Newport Beach, California; James S. Regan ran the Princeton, New Jersey office, investors and execution (Wikipedia; Princeton Info)
- Headquarters
- Two offices: Newport Beach (research and models) and Princeton (trading, operations, investors)
- Ownership / structure
- Private limited partnership; Thorp and Regan equal owners, each putting in ~$25,000 at the start (Princeton Info)
- Fees
- 2% of assets plus 20% of gains (Princeton Info); Thorp's 1967 private partnership charged 20% of profits
- Scale (dated)
- $1.4m (1969) → $273m (end-1987) (Princeton Info); statistical-arbitrage sleeves of $30–60m (BOSS, 1985–87) and $10–54m (STAR, 1988–89) (Thorp, Wilmott)
- Signature record (reported, unaudited)
- 19.1% a year gross / 15.1% net, Nov 1969–Dec 1988; 227 up months and 3 down months (secondary sources; MoneyWeek: $1,000 → $13,920 vs $6,450 for the S&P 500); 18.2% a year to limited partners after fees (Princeton Info, 2017); "20% after fees for over two decades, without a single down quarter" (WSJ, 22 Mar 2008, via Wikipedia) — basis and period differ
- Regulators and courts
- US Attorney for the Southern District of New York; SDNY (Judge Carter); Second Circuit (United States v. Regan, 937 F.2d 823, 28 Jun 1991)
- Signature moves (incl. failures)
- Beat the Market and warrant hedging (1967); founding Convertible Hedge Associates (1969); model-based convertible and option arbitrage at scale (1973–87); statistical arbitrage — BOSS and STAR (1985–89); the raid, indictment and wind-down (1987–88, failure); the convictions and the appeal (1989–92); Thorp's later record — Ridgeline and the Madoff check (1991–2002)
7 strategic moves analysed
Each one gets a full strategy file in the companion: context, the decision, the financing, what happened, and the lesson.
1967
Beat the Market and Warrant Hedging
New strategy (published)
1969
Convertible Hedge Associates Founding
Founding or fund launch
1973
Option Models and Convertible Arbitrage at Scale
New market and technology bet (listed options; computing)
1985
Statistical Arbitrage BOSS and STAR
New strategy (statistical arbitrage); hiring and joint venture
1987
Raid Indictment and Wind Down
Regulatory, enforcement or legal action; closing a fund (failure)
1989
Convictions and the Appeal
Regulatory, enforcement or legal action (trial, conviction, appeal)
1994
Ridgeline and Thorps Later Record
Founding or fund launch (successor); closing a fund