The father of hedge fund is considered to be Alfred Jones. He came up with the term hedged fund and created the first hedge fund structure in 1940. But Warren Buffet would say that the father of hedge fund industry is Benjamin Graham, who he says managed a hedge fund in mid 1920s.
As the historians and Warren Buffet would disagree on who is the father of hedge funds – we gathered facts form hedge fund history in both sides.
Alfred W. Jones is credited with coining the phrase “hedged fund” and is erroneously credited with creating the first hedge fund structure in 1949. Jones referred to his fund as being “hedged”, a term then commonly used on Wall Street, to describe the management of investment risk due to changes in the financial markets.
Alfred Jones was born in Australia in 1901 to American parents. He moved to the United States as a young child, graduated from Harvard in 1923 and became a U.S. diplomat in the early 1930s, working in Berlin, Germany. He earned a PhD in sociology from Columbia University and joined the editorial staff at Fortune magazine in the early 1940s.
It was while writing an article about current investment trends for Fortune in 1948 that Jones was inspired to try his hand at managing money. He raised $100,000 (including $40,000 out of his own pocket) and set forth to try to minimize the risk in holding long-term stock positions by short selling other stocks. This investing innovation is now referred to as the classic long/short equities model. Jones also employed leverage in an effort to enhance returns.
In 1952, Alfred Jones altered the structure of his investment vehicle, converting it from a general partnership to a limited partnership and adding a 20% incentive fee as compensation for the managing partner. As the first money manager to combine short selling, the use of leverage, shared risk through a partnership with other investors and a compensation system based on investment performance, Jones earned his place in investing history as the father of the hedge fund.
Jones’s company, A.W. Jones & Co., is probably credited as being the first hedge fund because it was the first to be labeled a “hedge fund,” a term that appeared in an April 1966 article by Carol Loomis in Fortune magazine titled “The Jones Nobody Keeps Up With.”
It was an in-depth profile of Jones, a sociologist and former Fortune writer whose research for a story on technical approaches to investing in the stock market prompted him to leave journalism for finance.
Jones’s “hedge” concept put him in a position to profit on both rising and falling stocks. He used strategic short positions to protect himself and his investors in case he misjudged the general market trend. This was different from most investment strategies at the time, which tended to protect a portion of capital by maintaining cash reserves or bonds.
Loomis’s article noted that Jones’s funds had outperformed the top mutual fund over the previous five years by 44 percent, and had made a 670 percent return over 10 years. The story catapulted Jones to legendary status in the investing world.
Although Jones’s approach was undeniably effective, particularly during that period, his hedge method may not have been unique.
Buffett asserts that, decades before Jones, Graham and his business partner, Jerry Newman, were operating two companies with standard hedge-fund characteristics. And Buffett should know, as he worked for both.
“When I formed my own partnership in 1956, I was probably influenced in the structure I established by my knowledge of the Newman and Graham partnership,” Buffett wrote.