A Brief History of Hedge Funds

Before turning to an investment strategy or seeking advice about various hedge fund strategies, it is helpful to take a look at the history of the practice at hand.  The global hedge fund world first started in 1949 with the financial journalist Alfred W. Jones.  He saw that asset price changes can be attributed to two main factors.  These changes were partly attributable to specific issues with the asset and partly to market trends.

Jones decided to balance his portfolio to neutralize these effects by buying assets that he believed would increase in price, and then short selling stocks whose price he thought would decrease.  This investment strategy was considered market neutral, as the returns that he saw were dependent on the stocks that he picked and not on the stock market fluctuations.  Interestingly, Jones saw that his fund was being “hedged” and from here the terms “hedge fund” and “hedge funds” were born.

By 1968, approximately 200 global hedge funds existed, with the first fund of hedge funds created in Geneva in 1969.  The pattern during the 1970s for the global hedge fund industry was to specialize in one main strategy; most hedge fund managers followed Jones’ lead and used his long/short equity model. During the 70s, the hedge fund industry lost much of its popularity with the economic downturn, but they made a comeback in the 80s with media profiles on a number of global hedge funds.

The 1990s saw a dramatic rise in hedge fund interest with the success of the stock market and the boom of the internet age.  During this time, and into the new millennium, hedge fund managers started to diversify their strategies and to create global hedge funds that were far more heterogeneous than ever before.

In recent years, there has been a move to regulate hedge funds more concretely.  The Securities and Exchange Commission in 2004 requires hedge fund managers to register as investment advisors under the Investment Advisor’s Act of 1940. Other organizations, like the Managed Fund Association, or MFA, represent the global hedge fund industry by advocating for public policies that foster more transparent and fair capital market practices.

Today’s hedge funds offer a variety of strategy choices. While some still follow Alfred W. Jones’ advice and practices, others have re-invented traditional hedging techniques and have had success with alternative strategies.  The industry continues to grow at a rapid pace, with the most recent estimations saying its size is at about $1 trillion.

About James Cannon

James Cannon is an experienced hedge fund analyst. He has served on the advisory boards for various different Fortune 500 companies as well as serving as an adjunct professor of finance. James Cannon has written for a variety of Financial Magazines both on and off line. Contact James at james[at]businessdistrict.com