White Peaks Asset Management

The term Hedge Fund, is said to have originated in 1949 when Alfred Winslow Jones combined a leveraged long stock position with a portfolio of short stocks in an investment fund with an incentive fee structure. Although some have argued that the Jones-style hedge fund is the only true one, the term is now universally used to describe the housing for a diverse range of investment strategies.

In 1966, Fortune magazine published an article by Carol Loomis entitled "The Jones Nobody Keeps Up With" that highlighted Jones's hedge fund.

Loomis's article shocked the investment community by showing that Jones's relatively unknown hedge fund outperformed all the mutual funds of its time. The best mutual fund over the prior five years had been the Fidelity Trend Fund, but Jones's fund outperformed it by 44 percent. The best mutual fund over the prior ten years had been the Dreyfuss Fund, but Jones's fund outperformed it by a whopping 87 percent. The article was widely read, and enterprising investors tried to imitate Jones's fund. The number of hedge funds quickly jumped from a handful to more than a hundred. However, the majority of the new managers were seduced by the lure of incentive-based fees and leverage in a bull market and quickly abandoned the time-consuming, risk-reducing process of hedging a portfolio with short sales. As a result, in the bust years of the early 1970's many of the more inexperienced fund managers suffered significant losses and had the exit the hedge fund industry. Survivors of the first spate of attrition, such as George Soros and Michael Steinhardt, went on to become some of the largest hedge fund managers in the industry.

It is important to note that Jones came up with a novel and successful investment strategy. However, to pool investor assets he needed a structure, and because the public mutual fund structure did not accommodate the requirements of the strategy, he used the private limited partnership instead. When hedge fund managers decided to pool monies offshore, they also used private investment structures that incorporated many of the same features.

As the more successful hedge fund manager's assets under management grew, some of them changed their approach. In the 1970s and 1980s, managers with roots in stock picking sought opportunities in broader global markets: fixed-income securities, foreign exchange, equities, and commodities. Because they retained the private investment structure that allowed them to maintain the ability to go long and short and use leverage, the term hedge fund stuck wit them in discussions of the investment pool. The strategy that they used, however, was described as "global macro, "global opportunistic," or just "macro."

At the same time, computerization, information technology, new markets, and investment instruments such as options, futures and, and swaps created new opportunities for smaller specialized money management firms. In putting together private investment pools, the hedge fund model was adopted, as was its name, by both managers and investors alike. But the underlying strategy that the manager used included any one of a number of existing or new approaches, such as fixed-income arbitrage, equity-market-neutral investing, or event-driven investing. The unifying element of hedge funds is its structure.