1 Boring Old Man

The Father of the Hedge Fund

^{Alfred Jones was born in Melbourne, Australia in 1901 to American parents. He moved to the United States as a young child, graduated from Harvard in 1923 and became a U.S. diplomat in the early 1930s, working in Berlin, Germany. He earned a PhD in sociology from Columbia University and joined the editorial staff at Fortune magazine in the early 1940s.}

^{It was while writing an article about current investment trends for Fortune in 1948 that Jones was inspired to try his hand at managing money. He raised $100,000 and set forth to try to minimize the risk in holding long-term stock positions by short selling other stocks. This investing innovation is now referred to as the classic long/short equities model. Jones also employed leverage in an effort to enhance returns.}

^{In 1952, Jones altered the structure of his investment vehicle, converting it from a general partnership to a limited partnership and adding a 20% incentive fee as compensation for the managing partner. As the first money manager to combine short selling, the use of leverage, shared risk through a partnership with other investors and a compensation system based on investment performance, Jones earned his place in investing history as the father of the hedge fund.}

Introduction To Hedge Funds
by David Harper

^{Hedge funds are like mutual funds in two respects: (1) they are pooled investment vehicles … and (2) they invest in publicly traded securities. But there are important differences between a hedge fund and a mutual fund… investors give hedge funds the freedom to pursue absolute return strategies.}

^{Mutual Funds Seek Relative Returns}

^{… A mutual fund’s goal is to beat the index … even if only modestly. If the index is down 10% while the mutual fund is down only 7%, the fund’s performance would be called a success. On the passive-active spectrum, on which pure index investing is the passive extreme, mutual funds lie somewhere in the middle as they semi-actively aim to generate returns that are favorable compared to a benchmark.}

^{Hedge Funds Actively Seek Absolute Returns}

^{Hedge funds lie at the active end of the investing spectrum as they seek positive absolute returns, regardless of the performance of an index or sector benchmark. Unlike mutual funds, which are "long-only", a hedge fund engages in more aggressive strategies and positions, such as short selling, trading in derivative instruments like options and using leverage  to enhance the risk/reward profile of their bets.}

So, why do you or I care if the wealthy want to do this paradoxical thing with their money? It’s theirs to do with as they like. Well, read Klugman in my previous post. It doesn’t do anything for the companies whose stocks they buy. They’re not investing in America. They’re taking money out of the Market by treating it like a poorly managed Casino. It removes value from our country and concentrates the wealth in the accounts of the already very wealthy. And it’s sleazy, and is turning us into a nation of sleazes – not unlike human traffickers and arms dealers who will do anything to make profit for themselves. What the Hedge Funds do is legal, but it’s sucking the blood out of our system and out of our ethos. Sell what you haven’t bought and cover it later. Borrow money to bet with. Cover your bets with side bets. Don’t let anyone really see what you’re doing. Bernard Madoff lived in the loopholes such a system provides and was apparently just a plain old crook. But even the people who play it straight are crooks in a way – because they’re degrading our Market [and our morality] into a racket [in a betting parlor].

There’s a piece of this Madoff story that would be funny if it weren’t so tragic. Why did people invest with Bernard Madoff instead of with other more transparent [opaque] Hedge Funds? Well, Bernie didn’t actually qualify as a Hedge Fund Manager partly because he didn’t take 20% of the profits. He wasn’t greedy enough! That’s why the insiders in other Hedge Funds knew he was a fraud. They knew he couldn’t make that kind of money doing what they were doing. But what Hedge Funds actually do is so obscure and impenetrable that Madoff’s investors couldn’t see it. His clients were trying to beat even the Hedge Funds by investing with the lowest bidder. In a world where greed reigns supreme, it was his "ungreediness" that played to the greed of his clients.