Blog

The History of Hedge Funds

Hedge funds have seen significant changes over the last several decades. With increased access to real-time data, technology adoption, and the onset of Web3, we can expect the industry to evolve even more drastically over the next few years. In this article, we take a look at the fascinating history of the hedge fund industry.

Posted on
Read time
5 minutes

1949

Alfred Winslow Jones is credited with creating the first hedge fund strategy back in 1949. Jones aimed to eliminate the risk of investing solely in one specific stock and the risk of price fluctuations due to market influence.

With his company, A.W. Jones & Co, he invested $100,000 to create a market-neutral portfolio. He capitalized on assets with rising value relative to the market and sold short assets when he expected their price to decrease. This portfolio ‘hedged’ against movements in the market and coined the term ‘hedge fund’.

1952

In 1952, Jones converted his fund into a limited partnership and began using leverage to maximize profits. His team expanded and with this, he introduced incentive fees that converted hedge fund managers’ income from salaries to a portion of profit (20% plus a 2% performance fee). And thus, the first investment vehicle that combined a hedged strategy with leverage and incentive fees was created. We see it utilized by many hedge funds to this day, although some funds have moved away from the 2 and 20 structure in recent years.

1966

Finance professionals began to take more interest in hedge funds after a 1966 Fortune magazine article that highlighted Jones’ fund and its wild success. Jones not only outperformed every other mutual fund but he also beat out the best funds across a five-year period by a staggering 44%. In light of his outperformance, many new hedge funds were created with the hope of recreating the same success. By 1968, there were reported to be as many as 140 new funds having joined the market.

By 1969 the first fund of funds, a fund composed of diverse single-manager hedge funds, had been created.

1970

With the multitude of new players, the nature of hedge fund strategy began to change. Rather than Jones’ initial vision of hedging via short-selling, funds began using leverage to take long positions.

In the late 1960s, the market took a turn for the worse. The S&P 500 declined by 1/3rd and without proper hedging techniques, many funds fell apart during the bear market of 1969-1970 and 1973-1974. It took nearly 10 years for hedge funds to gain back their popularity.

1986

Following this period of failure one fund rose from the ashes and the media once again managed to stir interest in the hedge fund market. Julian Robertson’s Tiger fund started with $8 million in 1980 and by the 90s it was worth over $21 billion. Hailed as one of the most influential hedge fund managers of all time, Julian was known for mentoring the ‘Tiger Cubs’, hedge funds started by several of his former employees.

In 1986, Institutional Investor published an article highlighting the success of Robertson’s Tiger Fund and hedge funds once again became a hot topic. The market saw substantial growth throughout the remainder of the 80s and into the 90s.

1990

During the 1990s, many of the largest hedge funds of today began to emerge. New strategies entered the market and a wide variety of asset classes were introduced to funds. By the dot-com bubble burst of the early 2000s, high-profile funds began to fail, including Robertson’s Tiger Fund. During the 2008 crisis, the market faced hard times with many funds being left with no choice but to close.

2010s

Following a history of inconsistency, the SEC introduced certain regulations to the market. In 2004 it implemented rules that would require registration by hedge fund managers and sponsors. From there, regulations become more strict including the requirement of compliance officers, performance records, and systems to protect investors.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 reinforced these protections by emphasizing compliance requirements for reporting to the SEC. The Act was passed in order to make the entire U.S. financial system safer so a repeat of the financial crash of 2008 could be avoided.

Hedge Funds Today

In the 2020s, the hedge fund industry is flourishing. Although their strategies look considerably different from those Jones introduced in 1949, there are thousands of active hedge funds around the world. The current hedge fund industry has over $4 trillion in assets under management, with the top 20 funds earning more than $65 billion in 2021.

Are You An Aspiring Hedge Fund Manager?

Have you been considering launching your own hedge fund?

Whether you’re interested in launching a hedge fund, a crypto fund, or you want to build a track record with an incubator fund, Repool can help you get started.

Get in touch today for your free consultation.

Interested in launching your fund quickly and easily?

Disclaimer

Repool, Inc. (“Repool”) serves as an administrator to various pooled investment vehicles.  The content on this site, or any associated distribution platforms and public Repool online social media accounts, platforms, and site (collectively, “Distribution Channels”), is provided for information and discussion purposes only, and should not be construed as or relied upon in any manner as legal, business, tax, investment, or other advice. Repool’s services and information available on Distribution Channels are not a substitute for third-party professionals (including properly licensed and/or registered lawyers, brokers and tax professionals), and you should seek your own professional advisers, including legal counsel. Repool is not licensed to provide legal advice and is not registered as a broker-dealer or investment adviser, and Repool is not otherwise licensed or registered.

Any views expressed in posted content, such as articles, blogposts, commentary, videos, or social media, are those of individual Repool personnel or third-party authors and are not the views of Repool or our affiliates, unless explicitly stated otherwise. Additionally, with respect to any content or views available on Distribution Channels, Repool makes no representations that the information has been validated by independent, licensed third-parties, nor that such information has any enduring accuracy or appropriateness for any given individual or situation.

Laws and regulations applicable to the sale of securities, forming pooled investment vehicles (including private funds), and investment management (including serving as an investment adviser or commodity trading advisor) are complicated and occasionally ambiguous. Relevant law may come from the state, federal, or international level, and you may be under the regulatory oversight of one or many regulatory bodies such as, but not limited to, the Securities and Exchange Commission and the Commodity Futures Trading Commission. It is your responsibility to ensure that, when forming, offering interests of and managing any pooled investment vehicle, whether supported by Repool’s administrative services or not, you are in material compliance with applicable laws including obtaining any and all applicable licenses, permits, registrations, memberships, and approvals that are required in order to form, offer securities of and manage such pooled investment vehicle.  You should not rely upon Repool in making any such determinations or as a replacement for licensed, third-party professionals.

Welcome to the future of fund services

© 2022. Repool, Inc.