A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

With Princeton Newport, growth from new capital came slowly and was earned by performance. Over forty years this battle for funding changed dramatically. So-called alternative investments became the hottest new frontier for what to do with your money. Beginning in the late 1990s, you could, in effect, just put up a sign saying HEDGE FUND OPENING HERE, and a line of investors would quickly extend around the block. A modest-sized $100 million hedge fund earning a gross return of 10 percent per year ($10 million) may pay the manager or general partner a management fee of 1 percent of $100 million—$1 million. In addition, the manager gets 20 percent of the remaining $9 million in profit, or another $1.8 million, as a performance fee, for a total of $2.8 million per year. Some of this, perhaps $1 million, pays expenses, leaving a net of $1.8 million a year in pretax income. The investors, or limited partners, get the remaining $7.2 million for a 7.2 percent annual return. The general partners in a similar billion-dollar hedge fund—and there are scores of them—might share ten times as much, or $28 million a year. Even a little $10 million hedge fund would, with proportionate fees, expenses, and returns, provide a single general partner with $280,000 a year. It’s clear from this that you can get very rich running a hedge fund. With these rewards, we shouldn’t be surprised to find many of the (believed to be) best investors in the business running hedge funds.