Ed Thorp Part 3: How Surviving a Crisis and Created His Ideal Life

I’ve finished rereading Ed Thorp’s autobiography, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.

My last two posts covered Thorp’s rise from living in a house with fourteen people to academia to founding the hedge fund Princeton Newport Partners (PNP). PNP turbocharged his life’s trajectory, but then it encountered problems it would never recover from.

Jay Regan, Thorp’s partner, ran the Princeton, New Jersey, office, while Thorp ran the Newport Beach, California, office. In late 1987, Rudy Giuliani, US Attorney for the Southern District of New York, was after Michael Milken and Robert Freedman. Regan was friends with both of them and did business with them through PNP’s Princeton office. The office was raided by federal authorities, and Regan and four other leaders in that office were charged with various crimes. They were convicted, but years later their convictions were reversed on appeal; all charges were eventually dropped. Authorities never questioned anyone at the Newport Beach office, and Thorp and his office weren’t aware of what allegedly was happening in Princeton. They learned the details from PNP’s lawyers and news reports. The ordeal resulted in PNP winding down.

After leaving PNP, Thorp reflected on his next steps. He had more money than he could spend and decided to optimize his time for travel, time with his wife and kids, and exploring interesting problems.

Thorp went through a “period of adjustment,” he said. He consulted for an institutional investor, which led to his uncovering Bernie Madoff’s Ponzi scheme in 1991. He restarted his hedge fund operations with only four team members and focused narrowly on hedging Japanese warrants and investing in other hedge funds. In 1990, Ken Griffin was trading options and convertible bonds from his Harvard dorm room. Thorp recognized Griffin’s potential, shared PNP’s secrets with him, and became the first investor (i.e., limited partner) in Griffin’s new Citadel Investment Group. Thorp also came close to seeding David Shaw, founder of DE Shaw, the hedge fund that Jeff Bezos quit to start Amazon.com.  

In 1992, Thorp restarted his statistical arbitrage operations, choosing to manage a single large account for a large institution. In 1994, he launched Ridgeline Partners to manage his and others’ money. Between the two, he managed over $450 million (PNP’s peak had been $272 million). Thorp’s staff at PNP had been roughly eighty people across both offices. To run Ridgeline and the managed account, he had six people. He’d figured out how to run his new hedge fund in a way that suited the life he wanted to live.

In 2002, Thorp decided to wind down Ridgeline. More hedge funds were using statistical arbitrage strategies, which reduced the number of investable opportunities and thus his firm’s returns. More importantly, he wanted to have more time to enjoy his children and grandchildren and his wife. When she died of cancer in 2011, Thorp was thankful he’d prioritized time with her over making more money.

PNP’s demise was “traumatic” and likely destroyed future wealth in the billions for Thorp. Thorp wisely used that event to transition to the third phase of his life—one centered on spending time with people he cared about, not wealth accumulation. He continued to invest and solve interesting problems in a way that best served his new way of living. Thorp had created his ideal life.

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