The real problem is trying to assign a value to p. If my performance up to this point is representative of my skills, then p would be very nearly 1. If I’ve just been lucky, then p might be 0.2 or less.

Getting other investors is pretty much right out of the question until I have a “usable track-record”.

The first question to ask is how you define ‘ruin’ and how much you’re willing to risk. When using full Kelly Betting, the chance of being reduced to 1/n of your original bankroll is 1/n (for example there’s a 50% chance of being reduced to 50% at some point, a 10% chance to be reduce to 10%, and so on). Most people use a fraction of the Kelly Criterion to reduce the risk of ruin (for example, use 1/2 of what the Kelly Criterion recommends).

The next question is the amount of your bankroll that you should place on one bet (like a hedge fund). For example, let’s say that half the time you lose all you money, and the other half of the time you make 10x your money. We’d have this equation:

f = [bp - q]/b
(where f = percentage of bankroll to bet, b = odds of bet, p = percentage chance of winning bet, q = percentage chance of losing bet = 1-p)

f = [(10)(0.5) - (0.5)]/(10)
f = 4.5 / 10 = 45%

In fact, in the limiting case as b goes to infinity, the most you’d ever bet under the Kelly Criterion for a weighted coin flip is 50% of your bankroll. Taken a step further, the maximum bet for an infinite ‘b’ (payout) is the percentage chance of winning the bet.

Lim b->inf of f = [bp - q]/b is f = p

So, I would say that there isn’t any bet that’s so good that you’d ever bet your whole bankroll on it. When using half Kelly, the biggest bet you’d ever make is half your bankroll, and that would be for a sure bet only.

Of course, the hedge fund outcome is really the result of many small bets (not just one big bet), so it’s hard to apply Kelly Betting perfectly. My gut-feel, though, is that you should only start this with at most half of your net worth (and maybe get other investors to cover the difference)… Just a thought…

I realize that the industry is glutted, but unfortunately I’m unlicensed and have no “pedigree”. As such, my options are very limited. Still, my investment performance over the last several years has soundly beaten over 99% of all managed funds. I’m not discounting the possibility that I’ve just been extremely lucky, but if I do have skills, then I want to make the most of them.

This is just ridiculous, though. Adsense really does seem to bring out the worst in people.

(their copy is at thedailyinvestment.net/calculations)