| In
1949 Alfred Winslow Jones and four friends formed an investment partnership—the
first hedge fund—with Jones as the Managing Partner.
Alfred
Winslow Jones was more of an intellectual than an investor. He was educated at Harvard and later received
a Ph.D. in Sociology from Columbia where his
dissertation was turned into a published book, Life, Liberty and Property: A Story of Conflict and
a Measurement of Conflicting Rights.
Throughout his life he remained interested in sociology and engaged in
philanthropic endeavors, particularly the alleviation of poverty in the U.S. and abroad.
Investment
management was Alfred’s fifth career when he started A.W. Jones & Co. at
the age of 48. Earlier in his life, he
was in the Foreign Service in Berlin,
and then became an observer for the Quakers in the Spanish Civil War,
monitoring civilian relief efforts.
During World War II he was a writer and editor for Fortune Magazine
covering a variety of topics from finance, to politics, to the war effort. By 1948 he had left Fortune but was working
freelance for the magazine on an article entitled “Fashions in
Forecasting.” It was during the research
for this piece on technical stock market analysis that he began to formulate
the ideas for his fund.
The Key Insight
While
Jones was interested by the technical analysis employed by market forecasters,
he was not convinced of their ability to consistently predict the direction of
the market. This led to his thinking
about ways in which a fund could keep its capital fully invested while having a
lower exposure to swings in the market.
His
key insight was that a fund manager could combine two techniques: buying stocks
with leverage (or margin), and selling short other stocks. Each technique was considered risky and highly
speculative, but when properly combined together would result in a conservative
portfolio. The realization that one
could use speculative techniques to conservative ends was the most important step
in forming the hedged fund. Using his knowledge of statistics from his background
as a sociologist, Jones developed a measure of market and stock-specific risk
to better manage the exposure of his portfolio. [Please see the section entitled “Managing a
risk-adjusted portfolio” for further discussion on this.]
It
is important to note that Jones referred to his fund as a “Hedged
Fund” not a “Hedge Fund” because he believed that being hedged was the most
important identifying characteristic.
Many “hedge funds” today are unregulated investment partnerships with
performance compensation structures, but some of them may not actually be
hedged.
Transformation and
Expansion
Not
long after founding the firm, Jones began bringing other managers into the
partnership to run sections of the portfolio, and he soon ceded control of
stock selection to these managers. The
20% performance allocation attracted top-quality investment talent, and by
allocating out sections of the portfolio Jones was able to diversify manager
risk. Essentially, Jones had created an in-house fund of funds with multiple
managers running portfolios under one legal entity (the limited partnership)
supervised by Jones. Jones’s job changed
from picking stocks, to picking stock analysts.
He allocated capital among them, monitored the portfolio’s exposure, and
managed the firm’s operations.
The Fund’s remarkable record
during its first twelve years of operations fostered enormous growth in its
assets and partners. In 1961 a second
fund was created for investors with differing tax requirements. This fund was subsequently merged back into
the original fund in 1970 and the name of the partnership was changed to A.W.
Jones Company.
The Next Generations
The next significant milestone
in the fund occurred in 1983 when Jones’ son-in-law, Robert L. Burch, III
became a General Partner. The following
year he became Managing Partner and fully transformed the firm into a
formalized fund-of-funds structure with no internal managers. This transformation was not a sudden break,
but rather the end result of the fund’s evolution toward a diversified,
multi-manager portfolio. As Burch was
making his initial allocations to external managers he wisely made the largest
allocation to a new hedge fund run by his old friend Julian Robertson. Tiger Management would go on to become one of
the largest and most successful hedge funds in the world. During the 1980s Alfred Jones continued to be
available for advice and counsel to the firm until his death in 1989 at age 88.
Today the family tradition
continues at A.W. Jones. Jones’ grandson,
Robert L. Burch, IV, became a General Partner in 2003 and manages the firm with
his father.
The
Industry Today
Remarkably, the operation that
started in 1949 with $100,000 in capital has now spawned an investment sector
with thousands of funds managing over $1 trillion. A.W. Jones Company continues to invest its
partners’ capital in Jones-model, hedged equity funds.
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