Original | Guan Liang's public account
Author | Easy to flow
Today, Guan Liang introduces you to a person who is not well known, but who has changed the world through financial innovation - the father of hedge funds - Alfred Winslow Jones.
Today, when people think of hedge funds, the most easily blurted out names are George Soros's Quantum Fund, Paul Tudor Jones' Tudor Investment Company, Steve Cohen's SAC Capital, Simon's Renaissance Medallion Fund, and most notoriously, John Mayweather's Long-Term Capital Management.
Alfred Winslow Jones (1900 – 1989)
Yet all of these hundreds of billions of dollars of players owe their methods to a gentleman, Alfred Winslow Jones, who is known as the father of hedge funds, but whose name is perhaps completely unfamiliar to millions of people around the world.
In the decades following the stock market crash of 1929, American financiers rose to prominence for conservatism, and investors, while still seeking good returns on their investments, seemed to favor a conservative approach and cast doubt on new and untested things.
Still, innovative investment approaches are emerging, one of which is the concept of hedge funds. One of the inventors of this new form of investment management was Alfred Winslow Jones, who is said to be the founder of the first hedge fund and is known as the father of hedge funds.
So who exactly was Alfred Winslow Jones and how did his ideas and innovations come about?
Personal experience of Alfred Winslow Jones
Born in Melbourne, Australia in 1900 by Alfred Winslow Jones, the son of a General Electric executive, the family returned to the United States after working in Australia for several years, and he grew up in Schenectady, New York, from the age of four.
He graduated from Harvard in 1923, but the innovative future investor never went to business school and had alternative career aspirations far from Wall Street.
After graduating from Harvard in 1923, Jones worked on a ship that traveled the world.
In the 1930s, Jones worked at the U.S. Foreign Office in Berlin, rather than in New York as a banker or investment worker.
In 1932, Jones secretly married Anna Bullock, the daughter of a wealthy left-wing Jewish socialite and German painter Joseph Bullock.
Forced to resign from the U.S. diplomatic corps as a result of marriage, Jones continued to live in Germany under a pseudonym, studying at a Marxist workers' school and on secret missions for an anti-Nazi group called the Leninist group.
While in Europe, he traveled to Spain with his wife and reported on behalf of the Quaker Relief Organization on the civil war that was taking place there at the time.
After returning to the United States, Jones received his Ph.D. in sociology from Columbia University in 1941 and became director of the institute's Institute for Applied Social Analysis.
His first project was a book published in 1941, Life, Liberty and Property, which reported on public attitudes toward large corporations.
Later, Fortune asked the erudite author to summarize the book in an article, and then formally hired him; it was from here that Jones began his involvement in finance.
From 1941 to 1946, Jones was a copywriter for Fortune magazine, continuing to write even after his work was over.
Fashion in anticipation
Fashion in Forecast, Published by Jones in 1949
In March 1949, Jones published a commemorative article titled Fashion in Anticipation (FIF). FIF aims to be a relatively simple work on the stock market, showcasing various types of rules-based investment strategies.
In Fashion in Forecasting, Jones outlines some of the technical analysis methods that were popular at the time or before, their strengths and weaknesses. It is clear from the article that his sociological knowledge helped Jones recognize that technology investment strategies are based on "the indisputable fact that psychological trend momentum." It is possible to predict the rise and fall of the market by measuring optimism and pessimism at the social level.
Jones had no active interest in finance at the time, which also allowed him to look at things through a unique lens and think differently.
He became fascinated when he conducted research for this article. At the time, the general theory of the stock market was that all information was priced at all times. In other words, any fall or rise in the stock market is associated with simultaneous events.
In FIF, Jones writes:
"The standard old-fashioned way to predict stock market movements is to first look at facts and data outside of the market itself, and then check if the stock price is too high or too low."
This arbitrage game can work, but often fails. Why? Because no competitive advantage is at work. The true principle of price discovery states that prices adjust to their true values only when there is an information gap. So, a better argument would look like this:
What do I know about Company X? What does the public know about Company X? If there is a poor information, trade it and make a profit.
As investors in 2021, we're obviously well aware of this fact, but in 1949 — the year this article was published — it wasn't a traditional idea.
System-driven approach
Jones believes that a truly successful approach to investing must be systems-driven. In FIF, he cites Mansfield Mill's working investment survey and describes building a trend-following strategy based on each company's daily ups/downs.
As we all know, how to continue to profit from these trends remains a mystery. Jones also observed that once certain strategies became popular and widely known, their effectiveness diminished. This is because, as he puts it, "there are many followers, and they have their own influence on the market". As sociologists put it, the market exhibits "reflexivity."
Mr. Jones rejects the old, traditional method of predicting market performance, which requires commodity prices and other economic data to determine stock prices — commonly referred to as "fundamental analysis," and points out that money may be an abstraction, a series of numerical symbols, a medium of expression of greed, jealousy, and prosperity, a barometer of mass psychology or madness that may reveal something very important.
Equally important, investor sentiment creates a trend in stock prices, which leads to a rise in investor optimism, which in turn leads to further optimism, among other things. The cycle generated by the rise in stock prices creates a trend that can track profitability. Know when to exit when crowd psychology is going in the opposite direction.
Don't forget that Jones is actually a sociologist who knows very little about academic economics.
Jones founded his own investment fund, AW Jones & Co
While researching the article, however, Jones stumbled upon a revolutionary idea that led him to abruptly quit his job and start the world's first "hedge fund."
While writing "Fashion in Forecast," Jones was also working on his new company, AW Jones & Co. Laying the groundwork, the company was founded in the same year that the Fortune article was published. The partnership was founded with $100,000 in assets under management, of which $40,000 was Jones' own funds. Despite the attention and connections his wealth articles, the money raised came from Jones' existing friends and family, one of whom he met during the Spanish Civil War more than a decade ago, who was engaged in rescue work.
AW Jones & Co. the structure is designed to circumvent the regulation of the Investment Companies Act of 1940 and has no more than 99 investors. Rather than widely distributing and accepting any willing investor, this approach avoids the need for publicity and advertising, which doesvetails very well with Jones's preference for low-key. It also allows Jones to keep more management fees as profits.
The difference between the new fund and those offered by traditional asset managers widens further, extending to investor liquidity. To reduce the likelihood of redemptions and forced liquidations by investors during periods of market volatility, redemptions (and new investments) can only be made at the end of each financial year.
Moreover, unlike most investment funds of the time, Jones created essentially a long-short hedge fund, or, in Jones's words, a "hedge" fund.
This investment strategy balances a long position, or bets that the price of one security will rise, while a short position bets that the price of another security will fall. This approach reduces the risk of market volatility, but also allows the fund to apply more leverage.
Internally, the fund is also very innovative. There are no centralized investment committees like more traditional companies, and employees manage money relatively independently. Jones and his deputy, Donald Woodward, will only decline trades when the trade doesn't match the overall exposure of the fund, for example, when a manager increases a short position on a stock that has been widely shorted by other employees.
This structure allows more employees to become fund managers. Instead of being fired for poor performance, give an employee less money to manage. Just like the entire company, employees must justify the inflow of new investors through good investments. If the manager truly believes that his strategy will ultimately succeed, then he will happily stick with it until it is proven right.
Performance of Jones hedge funds
AW Jones & Co. It delivered huge returns to its investors, beating out the market and the best-performing mutual funds of the day, such as Fidelity's Trend Fund, which was then managed by renowned investor Gerald Tsai. Jones achieved more than 1,000 percent cumulative returns in the decade up to 1968, when the company managed $100 million.
According to the Wall Street Journal, Jones and his partners returned nearly 5,000 percent cumulatively between 1949 and 1968.
Jones never advertised the fund, and its success spread through word of mouth.
For Jones, the first loss didn't come until 1962, 13 years after the fund's history, and the company was profitable even in years when the market was sluggish. In these strong profits, Jones and his team gained a large share. The company charges investors a fee of 20% of any gains.
1970 was his toughest year, when his fund lost 35 percent. By the early 1980s, he had transformed his fund into a fund within a fund (thus reinforcing his belief in being hedged).
In 2008, the Dow fell 34 percent. In a year like this, it's hard for any company to buck the trend.
Jones created a solution that fixed a basket of stocks with the same weights to each other — half at the buyer and half at the seller — so that his portfolio would remain "hedged" regardless of the overall market performance. As a fund manager, his job is to buy the best quality stocks and sell the worst stocks.
In Jones's case, his results say it all. Warren Buffett quickly copied Jones' long/short hedging structure, and over the course of 34 years, Jones' investors lost money for only 3 years (compared to years when the S&P index was negative for the same period).
Carol Loomis, who reports on Jones' career in Fortune magazine, said his performance was more due to good stock picking than to accurate timing of the market. Jones' approach predates Nobel laureate William Sharpe's "Simplified Model of Portfolio Analysis" by Nobel laureate economist William Sharpe.
Jones' financial innovation
It should be noted that going long or short has always been with us; the Wall Street crash of 1929 is a very powerful example.
George Soros and his deputy Stan Druckenmiller also took Jones' innovative approach, exerting maximum leverage when betting on the pound in September 1992, when the Bank of England made the deeply wrong decision to support the currency. George Soros made $1 billion from it.
Jones' idea also allowed Paul Tudor Jones to take on "short positions" and become one of the very few traders who made huge profits on October 19, 1987, commonly known as "Black Monday".
When a talented chartist or technical analyst discovers that there is a serious problem with a mortgage security and a huge default is imminent, contrarian investor John Paulson takes the option of buying as many credit default swaps (insurance policies) as possible to short the mortgage bond.
The use of leverage allowed John Paulson to establish a huge short position of $7.2 billion for his fund. By the morning of February 8, 2007, he had made a net profit of $1.2 billion — slightly more than george Soros had earned when he broke the Bank of England.
Financial hippies
Jones continues to be actively involved in social projects, and he himself says his work on Wall Street is a means to an end, not an end in itself. Jones said, "Too many people don't want to do something after they make money. They just move on and make more money. Jones would work abroad in the winter as a peace corps while managing his funds in the United States, all in an era when communications were less immediate.
He is also involved in a "Reverse Peace Corps" project that will bring social workers from developing countries to the United States to work in depressed American communities. Jones used his fortune to build a charitable foundation focused on poverty alleviation.
One competitor once called Jones a "financial hippie." His background and interests may justify this claim, but so does his work on Wall Street. In fact, the contender actually made statements based on Jones' radical contributions to finance rather than his social interests.
Jones' innovative companies are the counterculture of the financial industry, which remains appalled by the crash of 1929 and wary of the unfamiliar.
Jones is a sociologist and scholar, writer and journalist, as well as hedge fund manager and philanthropist. His contribution to finance, perhaps his most notable and important contribution, was the creation of a completely new form of investment vehicle, the hedge fund.
While it's hard to define exactly today, in part because hedge funds have a wide variety of commonalities, they at least take inspiration from the funds alfred Winslow Jones founded in 1949.
He died in 1988 at the age of 88, but his hedge fund continued to exist. His grandson Robert L. Burch IV runs the company with his father and son-in-law, Robert L. Burch III. In 1984, Burch III transformed the company into a full-fledged fund-based fund, directing $200 million of its clients' money into companies that adopted Jones-like principles.
He never went to business school or earned a Ph.D. in finance, but he revolutionized the world and influenced us through financial innovation.