History of Hedge Funds


The hedge fund industry traces its beginning back to 1949, when Alfred Winslow Jones established the first hedge fund in the U.S. Jones used two techniques considered speculative to protect his portfolio from a declining market – leverage and short selling Jones believed that stock selection was the key to performance regardless of market direction. He established a portfolio of long stocks which he believed would outperform the market and simultaneously sold short stocks expected to underperform, using leverage to magnify profits. In this way, his portfolio was positioned to make money in both rising and falling markets. Jones also established the performance fee structure for hedge funds by keeping 20% of the fund’s net profits for himself. As news of Jones’ success spread throughout Wall Street and the high-net-worth investor community, other money managers launched similar funds to reap the high performance allocations. Unfortunately, many of these managers strayed from Jones’ original concept and used leverage without short selling to reduce the market risk. As a result, when the markets began to fall, many of these hedge funds declined dramatically and gave hedge funds the reputation of being high-risk investments.

In the late 1970s, hedge funds began to attract more positive attention as exceptional hedge fund managers like Julian Robertson and George Soros posted extraordinary returns over long periods of time. However, the “macro” strategy of these two high-profile managers led to short-term volatility. As these funds attracted considerable media coverage, the public’s general perception was that all hedge funds were volatile; ironically, a large proportion of hedge funds had greater-than-market steadiness of returns as their mandate. They were lower-profile and so the public’s perception of hedge funds as being riskier than traditional investments persisted until, in the early 1990s, Greenwich Alternative Investments first began publishing its research, which quantified the reward-risk benefits of hedge funds.

Following publication of the watershed GAI research, perceptions changed slowly. This trend was assisted by the work of other companies that began assembling sizable databases and publishing their own results which corroborated with GAI's initial research findings. Since the early 1990's, investor realization that hedge funds are not necessarily as risky as the markets has been bolstered by the emergence of an increasing number of less risky hedge fund strategies. The percentage of riskier Macro and Emerging Markets strategies, popular in the early 1990s, became diluted as more conservative strategies, such as Value and Market-Neutral, came to the fore.

While there is still room for improvement for the public's education on the benefits offered through hedge funds, the hedge fund industry has gained credibility and considerable momentum. Today, Greenwich Alternative Investments continues the tradition GAI established more than a decade ago of providing independent research in an effort to promote better understanding of the benefits of hedge fund investing.

< Hedge Fund Essentials Overview Hedge Fund Strategy Definitions >