The Origin of Hedge Funds
The year was 1949, WWII just ended, and the world was in a unified celebration. Alfred Winslow Jones, a sociologist, was working on assignment for Fortune magazine investigating fundamental and technical research on forecasting the stock market. The article reported on a new class of stock market timers, in addition to unorthodox methods of investing, all to achieve positive returns and call the market. Jones was very intrigued by these trading methods and became absolutely consumed with his own concept of an investment fund.
Prior to the release of his Fortune article, Jones setup an investment fund with himself as general partner. The fund was designed as a market-neutral strategy, whereby the long positions in undervalued equities would be offset by short positions in others. This “hedged” position would allow capital to be leveraged, while also enabling large wagers to be made with limited resources. Another genius feature was having an incentive fee amounting to 20% of any realized profits or gains with no fixed fees.
However, Jones’ greatest notoriety stems from his innovation that specific limited partnerships, if structured correctly, are exempt from regulatory control under the Investment Company Act of 1940. This exemption allows managers to utilize techniques, such as leverage and short-selling which typically binds other mutual funds and investment companies. Consequently, many copy -cats mimicked the fee structure, but not the “hedge” mentality and philosophy that Jones inspired. It was not until another Fortune magazine article, in 1966, which branded the market-neutral strategy that Jones’ designed as a “hedge fund”.
