The History of Hedge Funds

The First Hedge Fund
In 1949, Alfred Winslow Jones started an investment partnership that is regarded as the first hedge fund. Remarkably many of the ideas that he introduced over fifty years ago remain fundamental to today’s hedge fund industry.
Jones structured his fund to be exempt from the SEC regulations described in the Investment Company Act of 1940. This enabled Jones’ fund to use a wider variety of investment techniques, including short selling, leverage, and concentration (rather than diversification) of his portfolio.
Jones committed his own money in the partnership and based his remuneration as a performance incentive fee, 20% of profits. Both practices encourage interest alignment between manager and outside investor and continue to be used today by most hedge funds.
Jones pioneered combining shorting and leverage, techniques that generally increase risk, and used them to hedge against market movements and reduce his risk exposure. He considered himself to be an excellent stock picker, but a poor market timer, so he used a market-neutral strategy of having equal long and short positions. Jones’ long-short strategy rewarded exceptional stock selection and created a portfolio that reacted less to the vagaries of the overall market. He also used the capital made available from short selling as leverage to make additional investments.