Alfred Winslow Jones

Alfred Winslow Jones
Born (1900-09-09)9 September 1900
Melbourne, Australia
Died 2 June 1989(1989-06-02) (aged 88)
Redding, Connecticut, United States
Residence Redding, Connecticut
New York City
Alma mater Harvard University,
Columbia University (Ph.D.)
Occupation sociologist
journalist
Hedge fund manager
Employer Foreign Service
Fortune magazine
A. W. Jones
Known for Founder of first modern hedge fund
Spouse(s) Anna Luise Hauser née Block
Mary Carter
Children Anthony Winslow Jones
Dale Burch

Alfred Winslow Jones (9 September 1900 – 2 June 1989), 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.[1]

Background

Jones was born in Melbourne, 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.[2] 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.[3] 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.[4] He then completed his doctoral thesis, Life, Liberty and Property, a survey of attitudes toward property in Akron, Ohio.[5]

Sebastian Mallaby dedicated a chapter in his 2010 book entitled More Money Than God: Hedge Funds and the Making of a New Elite, in which he describes Jones as a "an erudite dandy, a onetime Marxist who hiked to the frontlines of the Spanish Civil War with the writer Dorothy Parker—where they shared a bottle of Scotch whisky with Ernest Hemingway.[6]

Education

During the 1940s Jones worked for Fortune magazine and wrote articles on non-financial subjects such as Atlantic convoys, farm cooperatives, and boys' prep schools.[7] 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.[8]

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.[9]

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, A.W. Jones & Co., 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.[10]

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 leverage 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.[11] He charged no fee unless he made a profit.[12] 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.[13]

While a few investors, including Warren Buffett and Barton Biggs, adopted the structure that he created, Jones and his structure were 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."[14] 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.[15]

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.[16]

Later years

In 1984, Jones transformed his fund into a fund of funds, 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 that country, as a "hedge" against creating a culture of inferiority among developing countries.[4][17]

References

  1. ↑ Steve Johnson, A short history of bankruptcy, death, suicides and fortunes, Financial Times 27 April 2007
  2. ↑ Mallaby, Sebastian (2010). More Money Than God. City: Penguin Press HC, The. pp. 17–18. ISBN 1-59420-255-9.
  3. ↑ Marriage certificate, Amtsgericht Berlin-Tiergarten, Berlin/Germany, Nr. 38/1932
  4. 1 2 John Russell, Alfred W. Jones, 88, Sociologist And Investment Fund Innovator. NY Times 3 June 1989: Section 1, Page 11
  5. ↑ Alfred Winslow Jones, Life, Liberty, and Property, A Story of Conflict and a Measurement of Conflicting Rights. The University of Akron Press
  6. ↑ Patterson, Scott (16 June 2010). "The Long and Short of It: You'd be secretive, too, if you were making billion-dollar bets.". Wall Street Journal. Retrieved 31 December 2015.
  7. ↑ Alexander M Ineichen, In Search of Alpha, UBS Global Equity Research October 2000: 153
  8. ↑ Stephen J. Brown, Hedge Funds: Omniscient or Just Plain Wrong? NYU Stern School of Business 9 March 2001
  9. ↑ Michael Litt, Prudence: Paradigm Shift in Pension & Wealth Management. AEI POLICY SERIES 15 May 2006
  10. ↑ Alan Rappeport, A Short History of Hedge Funds. CFO Magazine 27 March 2007
  11. ↑ "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
  12. ↑ David Skeel, Behind the Hedge. Legal Affairs Nov./Dec. 2005
  13. ↑ David A. Vaughan, Comments for the U.S. Securities and Exchange Commission Roundtable on Hedge Funds. 14–15 May 2003
  14. ↑ Loomis, Carol, "The Jones Nobody Keeps Up With." Fortune April 1966: 237–247
  15. ↑
  16. ↑ Jones Model Funds. Hedge Fund Review 4Q (1995): 2
  17. ↑ Hugo Lindgren, Long-Short Story Short. NY Magazine 16 April 2007

Sources

Extended bibliography

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