Absolute Returns

A Half Century of Hedge Fund History

The first hedge fund made its debut in 1949, when sociologist Alfred Winslow Jones started a general partnership, later changed to a limited partnership, to trade equities. In his stock trades, Jones sometimes went long and sometimes sold short. Short sellers borrow a stock and sell it, expecting to buy it back at a lower price and then return it to the lender. Traders who "go long" expect the price to go up; those who sell short expect the price to fall. Jones’s ability to profit both ways was extraordinary. Other hedge funds followed.

In 1956, Warren Buffett established a partnership which resembled a hedge fund in most ways; the difference was that Buffett did not sell short. From 1956 to 1969, his returns were 29.5% compounded. Buffett’s compensation depended on the fund’s performance. His investors received a 6% return plus 75% of any profits above a 6% "hurdle rate." Buffett himself received 25% of profits above the 6% rate. Buffett was a contrarian, and specialized in finding and buying stocks that he thought were undervalued. When the market soared in the late 1960s, he couldn’t find enough undervalued stocks to practice...