The Creation of the Hedge Fund may surprise you:
Near the end of the Depression, a 38-year-old sociology graduate student trudged off to Akron, Ohio, to research his dissertation on industrial relations. Nobody could have predicted what would transpire over the next decade. Alfred Winslow Jones turned his dissertation into a book, which turned into a story for Fortune, which turned into a job at the magazine, which was his initiation into the world of business and led to the founding of the world’s first hedge fund in 1949. Yes, the low-rent precincts of sociology, the Rust Belt, and journalism all played a part in creating the financial rocket ship of our times.The term that Jones used was “hedged fund.” It promised the Shangri-la of investment strategies: profit without risk. Using a metric he called “velocity” — a precursor to what is now called beta, the measure of how closely a stock’s movement tracks the broader market — he split his holdings into two groups: good stocks that rose faster than the market in good times and fell slower than the market in bad times, and bad stocks that did the opposite. He took long positions in the former and short positions in the latter, theoretically ensuring that he’d make money whether the market went up or down.
Elegant as it was, it’s a difficult strategy to sustain. Who likes driving with one foot on the brake? When the market is humming and every jackass is cleaning up, it takes discipline to stay hedged and make less. But except for the occasional lapse, Jones apparently had it, eking out a dependable margin that, amplified with borrowed money, produced superior returns. His system demanded humility — it meant admitting that he couldn’t outsmart the market.