Hedge Fund History

May 7, 2009 James Heinsman Hedge Fund News

For the curious among us, here is a brief history of hedge funds.

A man named Alfred W. Jones is credited with creating the first hedge fund in the year 1949. He was not only a financial journalist but an author and sociologist as well. Jones’ understanding of price fluctuations of individual assets considered two separate components, the performance of the asset itself and the movement of the market as a whole.
Keeping these two separate components in mind he structured his fund in such way as to neutralize the effect of the overall market movement on his assets. He created a balanced, conservative portfolio by purchasing assets whose price he expected to perform better than the market ‘selling short’ assets which he expected to be weaker than the overall market performance. In this way Jones was able to reduce the risk of his fund’s loss in value due to market fluctuations since if the market goes down, his shorted assets’ value will increase even though his assets purchased long would go down; And if the market goes up, the gain in the ‘long’ assets would be cancelled by the loss of the ‘short’ assets value.

This type of fund became known as a ‘hedge’ fund, because by covering the risk of the market going either up or down you have ‘hedged’ your bets, so to speak- protected them on both sides.

Aside from a few notable exceptions Jones’ hedge fund approach to investing was not widely known until an article appeared in 1966 by Carol Loomis in Fortune magazine. Loomis praised Jones’ fund, coining the term ‘hedge fund’ and noting that his fund had outperformed the best mutual fund’s performance by 44% over the past five years and by 87% over the past 10 years.

Over the following three years over 130 hedge funds were begun.

Alfred W. Jones, Hedge Fund History,

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