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This categorization stems from the hedge fund's recent history, which began with the headline-making collapse of Long Term Capital Management in 1998 and continued with the astounding meltdown of the Tiger Funds in March of 2000, followed by the restructuring of the once high-flying Quantum Fund in April of 2000. These high-profile incidents outshine more than half a century of hedge fund history that began when Alfred Winslow Jones launched the first hedge fund in 1949.
Alfred Jones was born in Melbourne which is located in Australia in 1901 to an American parent. At his young age he moved to the United States, graduated from Harvard in 1923 and became a U.S. diplomat in the early 1930s, working in Berlin, Germany. He has earned his PhD in sociology from Columbia University and joined as 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 motivated to try his hand at managing money. He raised $100,000 (including $40,000 out of his own pocket) and set forward to try to minimize the risk in holding long-term stock positions by short selling other stocks. This investing originality is now referred to as the classic long/short equities model. Jones also employed leverage in an attempt to enhance returns.
In 1952, Jones was successful in altering 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. Seeing that 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 was rewarded in investing history as the father of the hedge fund.
When a 1966 article in Fortune magazine highlighted an ambiguous investment that outperformed every mutual fund on the market by double-digit figures in excess of the past year and by high double-digits over the last five years, the hedge fund industry was born. By 1968, there were for about 140 hedge funds in operation.
In an attempt to maximize returns, many funds turned away from Jones' tactic, which focused on stock picking coupled with hedging, and chose instead to connect in riskier strategies based on long-term leverage. These tactics led to profound losses in 1969-70, followed by a number of hedge fund closures during the bear market of 1973-74.
The industry was somewhat quiet for more than two decades, in anticipation of a 1986 article in Institutional Investor touted the double-digit performance of Julian Robertson's Tiger Fund. By means of a high-flying hedge fund once again capturing the public's attention with its stellar performance, investors flocked to an industry that now presented thousands of funds and an ever-increasing array of exotic strategies, together with currency trading and derivatives such as futures and options.
High-profile money managers abandoned the traditional mutual fund industry in droves in the early 1990s, looking for fame and fortune as hedge fund managers. Regrettably, history repeated itself in the late 1990s and into the early 2000s as a number of high-profile hedge funds, including Robertson's, failed in stunning fashion.