Hedge Funds from the 1960s to the 1990s

By the mid-1960s, Jones’ fund was still active and began to inspire imitations, some from investment managers who once worked for Jones. An SEC report documented 140 live hedge funds in 1968 [President’s Working Group, 1999]. A stock market boom began in the late 60’s, led by a group of stocks dubbed the Nifty Fifty, and hedge funds that followed the Jones’ long-short style appeared to underperform the overall market. To capture the rising market, hedge fund managers altered their investing strategy. Their funds became directional, abandoned the risk reduction afforded by long-short hedging, and opted for portfolios favouring leveraged long-bias exposure. During the subsequent bear market of 1972-1974, the S&P 500 declined by a third (adjusted for dividends and splits). Funds with leveraged long-bias strategies were battered—because of insufficient risk reduction techniques; they were effectively “unhedged.” As a result, many hedge funds went out of business, and hedge funds decreased in popularity for the next 10 years. A 1984 survey by Tremont Partners identified only 68 live hedge funds, fewer than half the number of live funds in 1968 [Lhabitant, 2002].
A mid-80s revival of hedge funds is generally ascribed to the publicity surrounding Julian Robertson’s Tiger Fund (and its offshore sibling, the Jaguar Fund). The Tiger Fund was one of several so-called global macro funds that made leveraged investments in securities and currencies, based upon assessments of global macroeconomic and political conditions. In 1985, Robertson correctly anticipated the end of the 4-year trend of the appreciation of the US dollar against European and Japanese currencies and speculated in non-US currency call options. A May 1986 article in Institutional Investor noted that since its inception in 1980, Tiger Fund had a 43% average annual return, spawning a slew of imitators [Eichengreen, 1999].