Alfred Winslow Jones
Encyclopedia
Alfred Winslow Jones a sociologist, author, and financial journalist, is credited with forming the first modern hedge fund
and is widely regarded as the father of the hedge fund industry.
, Australia
, the son of Arthur Winslow Jones (an executive of General Electric
) and his wife, Elizabeth Huntington. He moved to the United States with his family when he was 4. He graduated from Harvard University
in 1923, and, after working as purser
on a tramp steamer
that sailed around the world, he joined the Foreign Service
. In the early 1930s, he became vice consul
at the U.S. embassy in Berlin during Hitler's rise to power. In 1932, for a couple of months he was married to Anna Luise Hauser, née Block (1896–1982), a daughter of the German painter Joseph Block
and a descendant of German banker Joseph Mendelssohn
. In 1936, he married Mary Carter, with whom he travelled through Spain
during that country's civil war
, reporting on civilian relief for the Quakers. In 1941, he earned a doctorate in sociology
at Columbia University
. He then completed his doctoral thesis, Life, Liberty and Property, a survey of attitudes toward property in Akron, Ohio
.
, and boys' prep schools
. In March 1949, Jones was investigating technical methods of market analysis for an article titled "Fashions in Forecasting", reporting on a new class of stock-market timers and the approaches they employed to call the market. He studied a dozen or so of these "technicians", whose approaches ranged from volume/price ratios to odd-lot statistics to the outcome of the Harvard–Yale football game.
In "Fashions," Jones assessed each approach, sometimes harshly and other times positively. For example, Jones commented on one analysis that "…the market trend succeeded itself 62.5 times out of a hundred and reversed itself 37.5 times. The probability of obtaining such a result in a penny tossing series is infinitesimal." Jones was looking for approaches that offered better than a 'fair game.' He noted that certain approaches require trending markets, others work in higher volatility environments, still others in improving credit markets. He was beginning to feel his way down a dimly lit path toward what today would be considered a factor-based approach to portfolio construction.
Jones's comments on Nicholas Molodovsky's work showed he thought highly of it. In one passage on Molodovsky he said, "Well controlled experimental work of this nature is important and likely to become more accurate as the methods are further developed." He hinted at the approach of risk-weighting individual stocks, as well as quantifying how far a stock has diverged from its fundamental value.
The research gave him the idea to try his own hand at investing. Two months before the Fortune article went to press, Jones had established an investment partnership that would exploit this new style of investing. He raised a total of $100,000, $40,000 of which was his own. In its first year the partnership's gain on its capital came to a very respectable 17.3 percent.
to buy more shares, and used short selling to avoid market risk. He bought as many stocks as he sold, so market-wide moves up or down would be a wash on the total value of such a portfolio. The crucial question, then, would not be the direction of the market but whether the manager had picked the right stocks to buy and sell. The fund avoided requirements of the Investment Company Act of 1940
by limiting itself to 99 investors in a limited partnership
. Jones chose to take 20 percent of profits as compensation, invoking the Phoenician sea captains who kept a fifth of the profits from successful voyages. He charged no fee unless he made a profit. These elements: a partnership structure where a percentage of profits is paid as compensation to the general partner/fund manager, a small number of limited partners as investors, and a variety of long and short positions, are the core elements of hedge funds today.
While a few investors, including Warren Buffett
and Barton Biggs
, adopted the structure that Jones created, he and his structure was not widely known until 1966. That year Carol Loomis
wrote an article called "The Jones Nobody Keeps Up With." Published in Fortune
, Loomis' article lionized Jones and his approach. The article's opening line summarizes the results at A.W. Jones & Co.: "There are reasons to believe that the best professional money manager of investors' money these days is a quiet-spoken seldom photographed man named Alfred Winslow Jones." Coining the term 'hedge fund' to describe Jones' fund, it pointed out that his hedge fund had outperformed the best mutual fund over the previous five years by 44 percent, despite its management-incentive fee. On a 10-year basis, Mr. Jones's hedge fund had beaten the top performer Dreyfus Fund by 87 percent. This led to a flurry of interest in hedge funds and within the next three years at least 130 hedge funds were started, including George Soros
's Quantum Fund and Michael Steinhardt
's Steinhardt Partners.
Alfred Jones's investors lost money in only 3 of his 34 years. By contrast, the S&P500 had 9 down years during a similar period. Jones's worst year was the fiscal year that ended on 31 May 1970, when he lost 35.3% (the S&P lost 23.4% over the same period). Alex Porter, one of Jones's portfolio managers, confirmed that their market exposure was aggressive, perhaps up to 120%. By contrast, Jones did relatively well during the market downturn of 1973–1974 by being conservative.
, investing its capital in other hedge funds with different areas of expertise and investment styles. He gradually disengaged himself from his office and gave his time to the Peace Corps
and even tried to establish a "reverse Peace Corps" in which aid recipients would send their own volunteers back to the United States to work with the poor in this country, as a "hedge" against creating a culture of inferiority among developing countries.
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
and is widely regarded as the father of the hedge fund industry.
Background
Jones was born in MelbourneMelbourne
Melbourne is the capital and most populous city in the state of Victoria, and the second most populous city in Australia. The Melbourne City Centre is the hub of the greater metropolitan area and the Census statistical division—of which "Melbourne" is the common name. As of June 2009, the greater...
, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, the son of Arthur Winslow Jones (an executive of General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
) and his wife, Elizabeth Huntington. He moved to the United States with his family when he was 4. He graduated from Harvard University
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
in 1923, and, after working as purser
Purser
The purser joined the warrant officer ranks of the Royal Navy in the early fourteenth century and existed as a Naval rank until 1852. The development of the warrant officer system began in 1040 when five English ports began furnishing warships to King Edward the Confessor in exchange for certain...
on a tramp steamer
Tramp steamer
A ship engaged in the tramp trade is one which does not have a fixed schedule or published ports of call. As opposed to freight liners, tramp ships trade on the spot market with no fixed schedule or itinerary/ports-of-call...
that sailed around the world, he joined the Foreign Service
United States Foreign Service
The United States Foreign Service is a component of the United States federal government under the aegis of the United States Department of State. It consists of approximately 11,500 professionals carrying out the foreign policy of the United States and aiding U.S...
. In the early 1930s, he became vice consul
Consul (representative)
The political title Consul is used for the official representatives of the government of one state in the territory of another, normally acting to assist and protect the citizens of the consul's own country, and to facilitate trade and friendship between the peoples of the two countries...
at the U.S. embassy in Berlin during Hitler's rise to power. In 1932, for a couple of months he was married to Anna Luise Hauser, née Block (1896–1982), a daughter of the German painter Joseph Block
Josef Block
Josef Block was a German painter.Block was born in Bernstadt an der Weide in Prussian Silesia. He was a scholar of the Breslau Art Academy, where his lifelong friendship with German dramatist Gerhart Hauptmann was established...
and a descendant of German banker Joseph Mendelssohn
Joseph Mendelssohn
Joseph Mendelssohn was a German Jewish banker.He was the oldest son of the influential philosopher Moses Mendelssohn. In 1795, he founded his own banking house. In 1804, his younger brother Abraham Mendelssohn Bartholdy, the father of the composer Felix Mendelssohn, joined the company. The bank...
. In 1936, he married Mary Carter, with whom he travelled through Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
during that country's civil war
Spanish Civil War
The Spanish Civil WarAlso known as The Crusade among Nationalists, the Fourth Carlist War among Carlists, and The Rebellion or Uprising among Republicans. was a major conflict fought in Spain from 17 July 1936 to 1 April 1939...
, reporting on civilian relief for the Quakers. In 1941, he earned a doctorate in sociology
Sociology
Sociology is the study of society. It is a social science—a term with which it is sometimes synonymous—which uses various methods of empirical investigation and critical analysis to develop a body of knowledge about human social activity...
at Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
. He then completed his doctoral thesis, Life, Liberty and Property, a survey of attitudes toward property in Akron, Ohio
Akron, Ohio
Akron , is the fifth largest city in the U.S. state of Ohio and the county seat of Summit County. It is located in the Great Lakes region approximately south of Lake Erie along the Little Cuyahoga River. As of the 2010 census, the city had a population of 199,110. The Akron Metropolitan...
.
Education
During the 1940s Jones worked for Fortune magazine and wrote articles on non-financial subjects such as Atlantic convoys, farm cooperativesCooperative farming
An agricultural cooperative, also known as a farmers' co-op, is a cooperative where farmers pool their resources in certain areas of activity....
, and boys' prep schools
University-preparatory school
A university-preparatory school or college-preparatory school is a secondary school, usually private, designed to prepare students for a college or university education...
. In March 1949, Jones was investigating technical methods of market analysis for an article titled "Fashions in Forecasting", reporting on a new class of stock-market timers and the approaches they employed to call the market. He studied a dozen or so of these "technicians", whose approaches ranged from volume/price ratios to odd-lot statistics to the outcome of the Harvard–Yale football game.
In "Fashions," Jones assessed each approach, sometimes harshly and other times positively. For example, Jones commented on one analysis that "…the market trend succeeded itself 62.5 times out of a hundred and reversed itself 37.5 times. The probability of obtaining such a result in a penny tossing series is infinitesimal." Jones was looking for approaches that offered better than a 'fair game.' He noted that certain approaches require trending markets, others work in higher volatility environments, still others in improving credit markets. He was beginning to feel his way down a dimly lit path toward what today would be considered a factor-based approach to portfolio construction.
Jones's comments on Nicholas Molodovsky's work showed he thought highly of it. In one passage on Molodovsky he said, "Well controlled experimental work of this nature is important and likely to become more accurate as the methods are further developed." He hinted at the approach of risk-weighting individual stocks, as well as quantifying how far a stock has diverged from its fundamental value.
The research gave him the idea to try his own hand at investing. Two months before the Fortune article went to press, Jones had established an investment partnership that would exploit this new style of investing. He raised a total of $100,000, $40,000 of which was his own. In its first year the partnership's gain on its capital came to a very respectable 17.3 percent.
The birth and development of the hedge fund concept
Jones married two speculative tools to create what he considered a conservative investment scheme. He used leverageLeverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
to buy more shares, and used short selling to avoid market risk. He bought as many stocks as he sold, so market-wide moves up or down would be a wash on the total value of such a portfolio. The crucial question, then, would not be the direction of the market but whether the manager had picked the right stocks to buy and sell. The fund avoided requirements of the Investment Company Act of 1940
Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934 and Investment Advisers Act of 1940, and extensive rules issued by the Securities and Exchange...
by limiting itself to 99 investors in a limited partnership
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
. Jones chose to take 20 percent of profits as compensation, invoking the Phoenician sea captains who kept a fifth of the profits from successful voyages. He charged no fee unless he made a profit. These elements: a partnership structure where a percentage of profits is paid as compensation to the general partner/fund manager, a small number of limited partners as investors, and a variety of long and short positions, are the core elements of hedge funds today.
While a few investors, including Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
and Barton Biggs
Barton Biggs
Barton M. Biggs is a money manager running Traxis Partners, a multi-billion dollar hedge fund based in New York City. He formerly held the title of "chief global strategist" for Morgan Stanley and was with that firm for 30 years....
, adopted the structure that Jones created, he and his structure was not widely known until 1966. That year Carol Loomis
Carol Loomis
Carol Junge Loomis is an American financial journalist, and editor-at-large at Fortune magazine.She attended Drury College, and graduated from the University of Missouri, with a Bachelor of Journalism degree in 1951....
wrote an article called "The Jones Nobody Keeps Up With." Published in Fortune
Fortune (magazine)
Fortune is a global business magazine published by Time Inc. Founded by Henry Luce in 1930, the publishing business, consisting of Time, Life, Fortune, and Sports Illustrated, grew to become Time Warner. In turn, AOL grew as it acquired Time Warner in 2000 when Time Warner was the world's largest...
, Loomis' article lionized Jones and his approach. The article's opening line summarizes the results at A.W. Jones & Co.: "There are reasons to believe that the best professional money manager of investors' money these days is a quiet-spoken seldom photographed man named Alfred Winslow Jones." Coining the term 'hedge fund' to describe Jones' fund, it pointed out that his hedge fund had outperformed the best mutual fund over the previous five years by 44 percent, despite its management-incentive fee. On a 10-year basis, Mr. Jones's hedge fund had beaten the top performer Dreyfus Fund by 87 percent. This led to a flurry of interest in hedge funds and within the next three years at least 130 hedge funds were started, including George Soros
George Soros
George Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...
's Quantum Fund and Michael Steinhardt
Michael Steinhardt
Michael H. Steinhardt is an American investor and philanthropist active in Jewish causes. He was one of the first prominent hedge fund managers, and is a graduate of the Wharton School of the University of Pennsylvania. He founded Steinhardt, Fine, Berkowitz & Co., a hedge fund, in 1967...
's Steinhardt Partners.
Alfred Jones's investors lost money in only 3 of his 34 years. By contrast, the S&P500 had 9 down years during a similar period. Jones's worst year was the fiscal year that ended on 31 May 1970, when he lost 35.3% (the S&P lost 23.4% over the same period). Alex Porter, one of Jones's portfolio managers, confirmed that their market exposure was aggressive, perhaps up to 120%. By contrast, Jones did relatively well during the market downturn of 1973–1974 by being conservative.
Later years
In 1984, Jones transformed his fund into a fund of fundsFund of funds
A "fund of funds" is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment...
, investing its capital in other hedge funds with different areas of expertise and investment styles. He gradually disengaged himself from his office and gave his time to the Peace Corps
Peace Corps
The Peace Corps is an American volunteer program run by the United States Government, as well as a government agency of the same name. The mission of the Peace Corps includes three goals: providing technical assistance, helping people outside the United States to understand US culture, and helping...
and even tried to establish a "reverse Peace Corps" in which aid recipients would send their own volunteers back to the United States to work with the poor in this country, as a "hedge" against creating a culture of inferiority among developing countries.
Sources
- John Russell, Alfred W. Jones, 88, Sociologist And Investment Fund Innovator. NY Times 3 June 1989: Section 1, Page 11
- Hugo Lindgren , Long-Short Story Short. NY Magazine 16 April 2007
- David A. Vaughan, Comments for the U.S. Securities and Exchange Commission Roundtable on Hedge Funds. 14–15 May 2003
- A.W. Jones, History of the Firm
- Sharon Reier, From Jones to LTCM: A Short (-Selling) History, International Herald-Tribune 2 December 2000
- David Skeel, Behind the Hedge. Legal Affairs, November/December 2005
- Alan Rappeport, A Short History of Hedge Funds. CFO Magazine 27 March 2007
- Michael Litt, Prudence: Paradigm Shift in Pension & Wealth Management. AEI POLICY SERIES, May 15, 2006
- "Learning to Love Hedge Funds; Hedge funds have been reviled as slick opportunists that fanned the flames of the collapse. Yet Sebastian Mallaby argues that they hold the key to a more stable financial system," Sebastian Mallaby, Wall Stree Journal, June 11, 2010
Extended bibliography
- Alfred Winslow Jones, Life, Liberty, and Property, A Story of Conflict and a Measurement of Conflicting Rights, 'The University of Akron Press
- ROGER LOWENSTEIN, WHEN GENIUS FAILED (2000);
- Scott J. Lederman, Hedge Funds, in FINANCIAL PRODUCT FUNDAMENTALS: A GUIDE FOR LAWYERS 11-3, 11-4, 11-5 (Clifford E. Kirsch ed., 2000);
- Brown, Heidi and John H. Christy. "Growing Pains." Forbes 11 June 2001: 74–77.
- Jones, Alfred Winslow. "Fashions in Forecasting." Fortune March 1949: 88–91, 180, 182, 184, 186.
- Landau, Peter. "Alfred Winslow Jones: The Long and the Short of the Founding Father." Institutional Investor August 1968:
- Landau, Peter. "The Hedge Funds: Wall Street's New Way to Make Money." New York Magazine 21 October 1968: pp. 20–24.
- Lindgren, Hugo. "Long-Short Story Short: The Creation Myth." New York Magazine 16 April 2007
- Loomis, Carol J. "The Jones Nobody Keeps Up With." Fortune April 1966: 237, 240, 242, 247.
- Loomis, Carol J. "Hard Times Come to Hedge Funds." Fortune June 1970: 100–103, 136–140.
- "Missing 'd.'" Grant's Interest Rate Observer 9 October 1998: 1–2.
- Scholl, Jaye. "Back to the Future." Barron's 31 July 2000: 32.
- Strachman, Daniel A. Getting Started in Hedge Funds. New York: Wiley, 2000.
- Strauss, Lawrence C., "The Legacy." Barrons 31 May 2004