The First Hedge Fund

I've been ruuning a hedge fund for 20 years. The type of client depends entirely on size. Most funds start small with friends and family money. Some start bigger like ex prop traders. Before the Volker rule many traders worked for banks known as prop traders (proprietary). The Volker Rule stopped that but prop traders thar had built up a decent track record could leave the bank and set up a fund and take they clients with them. Many of these would be banks clients which include HNW and family offices. Typically any fund under $100m under management would not have big institutional clients like pension funds. Fund of Funds (FOF) used to be a big part of the business but less so today. They used to reply on the fact that due diligence was hard and access limited. It's not the case today. So sub $10m is mainly the managers own money and friends and family. Sub $100m you may some HMW and family office and possibly a FOF. Post $100m you can start to attract interest of some of the more adventurous institutional investors. After £500 you're definitely in the institutional category. Institutions don't want to invest in small managers because they need to invest in size otherwise is not worth their effort but they also don't want to be your entire assets either hence the minimums. Once Institutions start coming in in size then asset levels can really accelerate as the aren't that many funds that are very large so they have a limited choice. So what type of client to have is entirely dependant on your size. In fact it's more dependant on your size than your returns. In the early days to have to be a bit racy to generate the interest. As soon as to get bigger to need to calm things down a bit.

The story was interesting but the title is misleading. This wasn't the first hedge fund. Benjamin Graham started his first fund in the 1920s which would be what we call a hedge fund today. Graham's fund might not be the first hedge fund but it came before Jones'.

As a person who works in HFT, I don't really understand the supposed edge of hedge funds. The article makes it sound like the core strategy is buying some stocks and selling others. Why is this revolutionary though? Selling is just offsetting the buys and reducing overall exposure to the market, equivalent to having bought less in the first place. Then the article mentions "buying in a bull market" and "selling in a bear market" - which obviously makes money, but is predicated on your ability to predict market moves, the possibility of which is highly questionable... And if you already know what the market is doing, then hedging only reduces your upside. It seems to me like the real strategy here is predicting market moves, and everything else is just paper shuffling. If directional investors want to limit their downside, then invest less in the first place.

Isn't there some quote from Warren Buffett about simple index fund investment typically beating hedge funds? Hedge funds' attempts at micromanaging risk gets in the way of simple compounding.

One part of this story that is new to me is that he sort of invented an early version of the modern pod shop. Of course he wasn't operating it with the same risk management discipline, but still interesting.

Interesting read, but I found this a missed opportunity to link AW Jones' journalistic background to some of the journalistic elements behind running a hedge fund.

Disclaimer - it's a thought I got from watching The Big Short, which portrayed Mark Baum as a sort of investigative journalist in a hedge fund manager's clothes. He takes a lead from a source, investigates a thesis, talks to primary sources, and drops his findings in public. More compellingly, he appears to gain access to meetings and people that ordinary journalists wouldn't, simply because he's seen as part of the system.

But unlike a regular investor, who can be tempted to call a spade a forklift if it meant that it would drive up the price, Baum's money comes from betting against the system. His "journalistic" pursuit of reality is motivated by skin in the game, as opposed to institutionalised bias.

Of course, the motivations behind journalists and hedge funds appear different, and the incentive for truth can vary too. But since so much of journalism is hostage to its financial model (advertising), it's arguable that there's little difference in key aspects. If your goal is to make money, and the means by which you make money affect your version of reality, then it's a comparison between apples.

Since hedge funds are incentivised to protect their investments against looming bear markets, they are also incentivised to see past the frothing-at-the-mouth hype that accompanies bull markets. Which I see as a mirror of the journalistic idea of speaking truth to power.

I am interested in any systems that can lead to people seeking out and producing high-definition versions of reality. Journalism is but one system, and it has no monopoly on this pursuit. The world comprises many such systems. I feel hedge funds could be considered one of them.

That the "first" (debatable) hedge fund was started by a journalist seems more than a coincidence.

I’m pretty glad that these types of articles get upvoted to the top.

the first hedge fund was a boat or an ox cart

Great article!

> It was started in 1949 by a middle-aged journalist with a masters in sociology and little-to-no investing experience.

Cue eyeroll. This triggered a rant in me. We really shouldn't be giving so much money to these people. But the problem is that we individually don't have much control over the matter because the majority of their clients are large pension funds, endowments, sovreign wealth funds, and government managers of social security, which themselves are managed by... managers who have an incentive to hand off the risk of being fired for poor performance to someone else. Very few clients are actually high net worth individuals who trust the skill of the hedge fund manager.

And indeed, most of them have no skill whatsoever. Hedge funds are, for a large part, part of a parasite economy, where large sums of money are diverted from astronomical sums of money without many people noticing.