Convertible Hedge Associates (CHA) was an early

alternative investment management company An alternative investment, also known as an alternative asset or alternative investment fund (AIF), is an investment in any asset class excluding stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as ...

founded by

Edward O. Thorp Edward Oakley Thorp (born August 14, 1932) is an American mathematics professor, author, hedge fund manager, and blackjack researcher. He pioneered the modern applications of probability theory, including the harnessing of very small correlatio ...

and a partner, Jay Regan, in November 1969. Based in

Long Beach Long Beach is a city in Los Angeles County, California. It is the 42nd-most populous city in the United States, with a population of 466,742 as of 2020. A charter city, Long Beach is the seventh-most populous city in California. Incorporate ...

California California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...

, CHA was said by Thorp to have been the first market-neutral

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

. In 1974 it was renamed as Princeton/Newport Partners. Princeton Newport Partners (PNP), founded in 1974, was stated by its founder, mathematics professor

, to be the world's first

market neutral An investment strategy or portfolio is considered market-neutral if it seeks to avoid some form of market risk entirely, typically by hedging. To evaluate market-neutrality requires specifying the risk to avoid. For example, convertible arbitrage a ...

hedge fund. The company was a pioneer in quantitative trading techniques, profiting from mispricings in

derivatives The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics * Brzozowski derivative in the theory of formal languages * Formal derivative, an ...

, and later

statistical arbitrage In finance, statistical arbitrage (often abbreviated as ''Stat Arb'' or ''StatArb'') is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousan ...

, which involved trading a large number of stocks for short-term returns. PNP achieved an annualized rate of return of 20 percent after fees for over two decades, without a single down quarter, until becoming embroiled in the junk bond schemes of

Michael Milken Michael Robert Milken (born July 4, 1946) is an American financier. He is known for his role in the development of the market for high-yield bonds ("junk bonds"), and his conviction and sentence following a guilty plea on felony charges for vio ...

's circle at

Drexel Burnham Lambert Drexel Burnham Lambert was an American multinational investment bank that was forced into bankruptcy in 1990 due to its involvement in illegal activities in the junk bond market, driven by senior executive Michael Milken. At its height, it was a ...

. Thorp and other principals at PNP were eventually cleared of wrongdoing, but the financial burdens imposed by the ensuing

Racketeer Influenced and Corrupt Organizations Act The Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. RICO was en ...

investigation forced PNP to liquidate. His circle of associates later regrouped as

TGS Management TGS Management (TGS) is an American quantitative investment management firm founded in 1989 that has offices in Princeton, New Jersey and Irvine, California. It is known to maintain a very low profile. Background In 1989, TGS was founded by F ...

, with focus on statistical arbitrage.

References

* Some notes about CHA history are available in Thorp's articles ''Option Theory: What I Knew and When I Knew It'', Parts 1 and 2, from ''Wilmott Magazine''. {{Hedge funds American companies established in 1974 Financial services companies established in 1974 Financial services companies established in 1969 Hedge fund firms in California