Alfred Jones Case Study

In 1901, Alfred Jones was born in Melbourne, Australia. He was born to American parents and moved to the United States very young, graduated from Harvard in 1923 and soon after became a U.S. diplomat in the early 1930’s. After working in Berlin, Germany,he acquired his PhD in sociology from Columbia University and began to work for Fortune magazine in the 1940’s. It was not till 1948 when Jones was inspired to attempt managing money. According to Investopedia, “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 type of investing is now known as the classic long short equity model. Finally, in 1952, Jones, remodeled the structure of his investment structure, changing it from a general partnership to a limited partnership, increasing the investment fee 20% for the managing partner. Creating this new model “as the first money manager to fuse short selling, the use of leverage, shared risk through a partnership with other investors and a reimbursement system based on investment performance,” (Investopedia) Jones earned his place in investing history as the father of the hedge fund.

When a Fortune magazine article highlighted a mysterious investment that exceeded every mutual fund on the market by double digits over the past year and even higher double digits throughout the past five years, the hedge fund business was created. There were just about 140 hedge funds in effect by 1968. In a surprising turn, many funds were withdrawn from Jones’ strategy and chose to charter in riskier gimmick backed on long-term leverage instead of focusing on stock picking coupled with hedging. These strategies led to cumbersome losses in 1969-1970 and between 1973-197...

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...and 20 compensation is used by a majority of hedge funds today and receives the most criticism due to the 2%. If a $1billion dollar fund loses money, the hedge fund manager will still pocket $20 million but he or she then has to rationalize to investors why their account values declined while vindicating getting paid the $20 million.

Overall, a hedge fund managers use particular trading strategies and instruments with the specific aim of reducing market risks to produce risk-adjusted returns, which are consistent with investors' desired level of risk. This career comes off as very attractive due to its ability and potential of being very profitable. When becoming a hedge fund manager, it is important to know how to consider comparative advantage, a defined investment strategy, have a marketing and sales plan, a risk management strategy, and adequate capitalization.