History of Hedge Funds

From its humblest beginnings as an investment strategy published in Fortune Magazine circa 1949, hedge funds have developed into a $1 trillion international industry.

The history of hedge funds

The roots of hedge funds date back to Alfred Winslow Jones. Jones was once a sociology student working on his thesis on industrial relations. He later developed the dissertation into a book, which was run as an article in Fortune Magazine where he later became a full time employee.

In 1948, Jones wrote an article about “current investment trends” for his employer which actually inspired him get more involved in the actual act of investing. He raised about $100,000 and tried to invest in a way that would maximize gains and minimize risks. The format he used was a combination of holding long-term stock by short selling other stocks, developing the “long/short equities model.”

Jones called this strategic investment combo “hedged funds.”

Jones tweaked his investment instrument in 1952 and its basic structure is still intact in today’s hedge funds. Jones converted the investment tool into a limited partnership arrangement. Additionally, he added a 20% performance fee as the fund manager’s compensation. The hedge fund combined many methods to mitigate the possible losses including leverage, the art of short-selling, compensation based on profitability and making it a collective investment scheme.

Hedge funds today

Hedge funds do not follow the same protocol as other types of funds registered with the SEC because they are considered “private offerings” and do not have to register. Nowadays, hedge funds utilize a full range of strategies including some that do not follow conventional hedging protocol.

Despite the troubles and unethical behaviors of some hedge fund managers, the particular instrument is not going anywhere and is responsible for even launching its own offshoot (fund of funds). The average investor is generally priced out of hedge fund investments as it is common that the fee to participate can range into the hundred of thousand dollar range.

However, funds of funds (an investment fund focusing on hedge funds) can be entered at the $25,000 range.