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Ed Thorp on Statistical Arbitrage, from Wilmott.

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chin:

--- Quote from: 陳文 on 07 September 2009, 11:24:48 ---These few weeks my self-learning on horse betting just started, terms like these are frequently heard: like Kelly's Criterion Fortune's formula, exponential distribution, etc. Also some psychological term like favourite longshot bias... Just coincidence or whatever, I heard the book 計得精彩 and is looking for it, (heard that the author will publish pdf verison 'sometime' later) Comments are good from all over the net (at least I saw none are bad). It might be good for me to brush up the learning by that book.
--- End quote ---

I have Fortune's Formula & 計得精彩. You can borrow the books if you want.

The first one is an easy light reading for fun. The actual formula is the above attached.

The second book is good only in the sense that it's the only Chinese text on serious math of racing. For you who can comfortably read English, you should just go for Efficiency of Racetrack Betting Markets. Favorite Long-shot Bias, etc... are also well discussed in the Efficiency.

chin:
I just finished reading "When Genius Failed - the Rise and Fall of Long-term Capital Management" by Roger Lowenstein.

Assuming Lowenstein's descriptions are accurate, what a contrast in style from Ed Thorp's as described in the above attachments!

In the Genius book, the LTCM guys, especially the main trader Hilibrand, can be almost say to be a "Martingale Man" - he would redouble in the face of losses. And in many occasion, Long-term was say to be "betting the farm". This is a sharp contrast to Kelly Criterion based concept to scale back in the face of losses & diminishing edge. In the Ed Thorp articles, there were a number of occasions where Ed Thorp either turned down addition capital or reduce the capital, in order to maintain the edge.

In the Genius book, the LTCM guys repeatedly characterize their models as picking up nickels here and there (and later "picking up nickels in front of the bulldozer" when they got into merger arb.) From the description in the book, they were picking up nickels mainly in the sense that they were pickup the minor inefficiencies overlooked by others, but not really "here and there" in the sense of large number of mostly unrelated trades. So they were hoping to found a very large pile of nickels and sent in a large vaccum. Their vaccum was leverage - around 20 times in 'normal' time and up to 20 times right before the trouble. At that leverage, 3% drop in asset value would (and did) whip out the entire capital.

The Ed Thorp stat arb described in the above articles, seem to me more truely a "nickel sucking here & there" operation. See my comment 2 in the 1st post.

In the Genius book, Goldman was said to be transformed from a gentlemen investment banker to a predatory trader. It front-ran the LTCM book while discussing a rescue and "raped" LTCM, according to the LTCM partners. While reading this part, I cannot help but to compare the now famous Goldman Sach high-frequency trading - perhaps by now the best known giant "nickel sucking" operation. From the public information, this strategy is compared to front running.

If front-running is so common-place & institutionalized, I am even more curious how Ed Thorp solve this problem (see 6 in my first post.)

BTW my comment regarding Long-term is perfectly aided by hind-sight. I am sure it was not entirely fair comment if made at the time of the event. But that's the fun of commenting on other's misfortune, in hinh-sight. Right?

(For my friends who are not entirely familiar with American English, nickel = US 5 cents coin, penny = US 1 cent coint, dime = 10 cents.)

q:
I think one of the big problems Hedge Funds have is holding onto talent, and hence the proprietary trading techniques.
Especially when most of the techniques applied for arbitrage and algorithmic trading are relatively simple (not a criticism
since we do the same).  So, the only thing competitors are missing is the twist.

kido:
I think any 'betting' strategies will result in a stochastic wealth behaviour, given that these bets are probabilistic.  So, trying to devise any strategies/algorithms will only results in a wild ride, the only hope is that it gives you returns before the wealth diminished.

Mind my ignorance here.  I'm not really in that industry (I think it's investment or wealth management or whatever you called) so please excuse me. Would you mind telling me what's a 'Martingale', how's it opposing to a Kelly's bet? I guess a 'Martingale' is a random bet?

Yes, I want 計得精彩 desperately, Fortune's formula would be bonus.  Thank you.

chin:

--- Quote from: 陳文 on 11 September 2009, 23:36:48 ---I think any 'betting' strategies will result in a stochastic wealth behaviour, given that these bets are probabilistic.  So, trying to devise any strategies/algorithms will only results in a wild ride, the only hope is that it gives you returns before the wealth diminished.

Mind my ignorance here.  I'm not really in that industry (I think it's investment or wealth management or whatever you called) so please excuse me. Would you mind telling me what's a 'Martingale', how's it opposing to a Kelly's bet? I guess a 'Martingale' is a random bet?

Yes, I want 計得精彩 desperately, Fortune's formula would be bonus.  Thank you.
--- End quote ---

Google or Wiki the term.

When a betting system ask you to increase the bet amount solely on the condition of lossing the last bet, and/or decrease to a smaller amount after a winning bet, this system is generally said to be "Martingale". And most of the Martingale systems are applied to independent event, which make it more ridiculous.

Call me to arrange a time to pick up the books.

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