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88/ "The core of the risk management is evaluating the risk of each market based on an exponentially weighted moving average of the daily dollar range per contract. "Through the chaos of 2008 and 2009, our volatility remained very near our target level of 12%." (p. 155)
89/ "Allowing the OTC markets to be unregulated and opaque makes as much sense as leaving 50 eight-year-olds unsupervised for a month. The OTC markets are very often used to take advantage of clients who are 'sophisticated' in the legal definition but naive in practice." (p. 156)
90/ "The OTC markets have been built to maximize asymmetries of information and are an example of how markets should not operate. Markets should be fair and transparent, as the futures and equities markets have mostly evolved to be." (p. 156)
91/ "Periods of poor performance are difficult. I generally handle it by focusing very hard on improving the trading system. "Look where others don't. Adjust position sizes to overall risk to target a particular volatility. Pay careful attention to transaction costs." (p. 157)
92/ Ed Thorp: Assuming winning and losing months are coin tosses, "the odds of getting at least one track record ≥ Thorp's would still be less than 1 out of 10^62. The odds of randomly selecting a specific atom in the earth would be about a trillion times better." (p. 162)
93/ "Track records such as Thorp's prove conclusively that it is possible to beat the market and that the large group of economists who insist otherwise are choosing to believe theory over evidence. (Thorp's track record is only one of many refutations of EMH.)" (p. 163)
94/ "This is a very conservative assumption since, in fact, the size of Thorp's average win was significantly higher than his average loss, which implies that the probability of Thorp achieving his win percentage by chance will be even lower than the estimate we derive." (p. 162)
95/ "Physicists would discuss models but wouldn't explain the assumptions carefully. Once I learned the logic of math, I could come back to physics and see quite clearly the assumptions they were making and why they were making them." (p. 170)
96/ "Life published an article, 'The Professor Who Breaks the Bank," which created a lot of publicity for blackjack betting systems. "They discussed various alternatives, including getting rid of me and breaking knees. Fortunately, they settled on changing the rules." (p. 180)
97/ "The abstract committee reviewed my [blackjack paper/talk] proposal, and unbeknownst to me, they were going to reject it as the work of another crank. "Fortunately, one of the members on the abstract committee was a number theorist whom I had worked with." (p. 181)
98/ "There was a much larger number of players who heard you could beat blackjack but were poor players. The casinos had a good thing, but they thought it was a bad thing. They started a war with the card counters. They tried to ban them. They beat up some of them." (p. 183)
99/ "The next day, on the drive home, the accelerator locked in the down position on a mountain road, and the car couldn't be stopped. The car sped up to 80 on this curvy mountain road. "Something had fallen off to make the accelerator rod lock down." (p. 188)
100/ Schwager: "Don't you think you might be have been better off exploiting the warrant trading on your own instead of publishing?" Thorp: "I don't think so, because historically, ideas don't just appear in one place; they tend to appear in several at the same time." (p. 190)
101/ "Warrants with less than two years to run typically traded at premiums that were too high. The typical trade we did was to short the warrant and hedge it by buying the stock. We started out with a static hedge and then decided that dynamic delta hedging was better." (p. 191)
102/ "The embedded optionality in convertible bonds tended to be underpriced, and funds could earn considerable profits by buying underpriced bonds and hedging the risk with short stock. Increased competition made the sophistication of the model more important." (p. 193)
103/ "The innovation vis-a-vis stat arb was that he grouped the stocks by industry and set up long/short portfolios. By adding industry neutrality, he significantly reduced the risk." (p. 201) A paper was published about this in 2011 (26 years later): <a target="_blank" href="https://twitter.com/ReformedTrader/status/1137800301740564491" color="blue">x.com/ReformedTrader…</a>
104/ "I decided there was a better way (1986): make the strategy factor neutral. We did a principal components analysis of the portfolio and tried to neutralize the principal factors. "The biggest PC is the stock market. The returns went up, and the risk went way down." (p. 203)
105/ "Over the years, hedge funds began to shift from having edges to being asset gatherers. At the same time, the fees increased. There was a time when a flat 20% profit incentive fee would do it. Then it became 20% incentive plus 1% management, then 2% management." (p. 209)
106/ "This tanker had a scrap value of $4 million, and Bruce Kovner bought it for $6 million. We just sat on it. It was sort of like an option on the oil market. When activity picked up, there was a huge demand for tankers, so our tanker got used over and over." (p. 210)
107/ "There are some versions of futures trend following that have a Sharpe ratio of about 1.0 or more, but that is low enough that there is still a significant risk of getting shaken out. "It worked but was risky enough that it was hard to stay with it." (p. 211)