Warren Buffett points out that the real first hedge fund he knows of was founded by his mentor, Ben Graham. Studies show that the concept might predate even Graham and hark back to the ancient Greeks. From Bloomberg:
The legendary economist and investor Benjamin Graham is widely known as the father of value investing. He may also be the father of the hedge-fund industry.
While most historians and industry professionals credit Alfred Winslow Jones with launching the first hedge fund in 1949, some people, including Graham’s protege, Warren Buffett, disagree.
“Ben Graham managed a hedge fund in the mid-1920s,” Buffett wrote in a letter to the Museum of American Finance. “It involved a partnership structure, a percentage-of-profits compensation arrangement for Ben as a general partner, a number of limited partners and a variety of long and short positions.”
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.
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.
Continue reading.
The legendary economist and investor Benjamin Graham is widely known as the father of value investing. He may also be the father of the hedge-fund industry.
While most historians and industry professionals credit Alfred Winslow Jones with launching the first hedge fund in 1949, some people, including Graham’s protege, Warren Buffett, disagree.
“Ben Graham managed a hedge fund in the mid-1920s,” Buffett wrote in a letter to the Museum of American Finance. “It involved a partnership structure, a percentage-of-profits compensation arrangement for Ben as a general partner, a number of limited partners and a variety of long and short positions.”
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.
A New Strategy
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.
Continue reading.
