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Introduction to the Evidence of the Use of Kelly Type Strategies by the Great Investors and Others

Leonard C MacLean, Edward O Thorp and William T Ziemba

Chapter 45 in The Kelly Capital Growth Investment Criterion:Theory and Practice, 2011, pp 657-662 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We know that in the long run, full Kelly strategies dominate other strategies, but they are very risky short term. Hence, practical applications to long sequences of wagers are especially appropriate. Current hedge fund trading that enters and exits in a few seconds is such an application. Thorp (1960) coined the term Fortunes's Formula in his application of Kelly to the game of blackjack using his card counting system. The count provides an estimate of the mean so that with more favorable counts the player should wager more. Typically, blackjack players can play about 60+ hands per hour. So this application works well for full Kelly. But the risk is high that even after a few hours, with say a 1% edge, a player may be behind. Hence, blackjack teams typically use fractional Kelly strategies, with fractions of 0.2 to 0.8 being common. Gottlieb (1984, 1985) describes the early use of these fractional Kelly strategies…

Keywords: Kelly Criterion; Dynamic Investment Analysis; Capital Growth Theory; Sports Betting; Hedge Fund Strategies; Speculative Investing; Fortune 's Formula (search for similar items in EconPapers)
Date: 2011
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