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Copyright, Becky Jacoby, 2007
An Fund Idea by Any Other Name?
In his letter sent as a response to an article in Financial History, the magazine of the Museum of American Finance, Warren Buffet debunks the statement the “first known hedge fund was started in 1949 by Alfred Winslow Jones.”
Respected financial paragons like Stuart McCrary or Peter Templeton seem to accept that hedge funds were Jones’ idea. McCrary assumes it in his Hedge Fund Course: “Hedge funds have existed for more than a half-century since Alfred Winslow Jones started a revolution in asset management.” Templeton tells of Winslow’s stint as associate editor at Fortune, giving credence to the initiative of taking and managing the long and short of stocks and scenarios within the same fund. Templeton even cites Carol Loomis’ story on this subject called “The Jones Nobody Keeps Up With.”
Buffet writes his point of view. “Ben Graham managed a hedge fund in the mid-1920’s.” Buffet explains that we know it was a hedge fund because it contained the characteristics of what some say Jones is famous for: partnership structure, a percentage-of-profits compensation for Graham as partner, other limited partners and the variety of long and short positions.
Was it Buffet’s intention to displace Jones? His letter concludes, “Incidentally, I make no claim that Ben’s. . .partnership was the first. It’s just the first that I know of.”
However, Buffet is not the first to share skepticism about hedge fund origin. Charles Gradante, managing partner of Hennessee Hedge Fund Advisory Group in New York, testified before the Senate Banking Committee in July 2004 about Jones’ strategies being used first by investment banks. In his testimony, he did acknowledge Jones as the first to use the hedge fund approach in a limited partnership. Accounting for Buffet’s and Gradante’s statements, there is competition for the founder position.
As an overview we might draw the conclusion that though we think we may yearn to be unique in our ideas and legacies, we may, in a lifetime of impressionable significance, still be displaced by another drop of water in the historical pond, especially when it trickles down to money.
That Cherry Tree Story Isn't True Either
Warren Buffett may have delivered a blow to a cherished origin-myth of the hedge fund nation. His weapon of choice was a letter, which appeared in the latest issue of Financial History, the magazine of the Museum of American Finance, New York.
Mr. Buffett's letter is a response to an article in the previous issue. The article made the unremarkable statement that the "first known hedge fund was started in 1949 by Alfred Winslow Jones."
Surely, everyone knows that story, just as every American over the age of four years knows that George Washington's father owned an orchard of cherry trees. Stuart McCrary's Hedge Fund Course assumed it with no argument: "Hedge funds have existed for more than a half-century since Alfred Winslow Jones started a revolution in asset management."
Peter Temple, in his strategy-by-strategy critique of the industry, gives the myth in full. Mr. Jones was an associate editor at Fortune in 1948–49, working on an article on market forecasting, when he got the happy thought that (a) no one can really forecast the market, but (b) it's possible to manage assets in a way that takes account of this ignorance, and protects investors from it, by taking both the long and the short side of various markets and scenarios.
By 1966, Mr. Jones was himself the subject of an admiring profile in his old journalistic home. That was the year Carol Loomis wrote a Fortune article titled "The Jones Nobody Keeps Up With." Mr. Temple calls Ms. Loomis' story a "short piece with explosive significance."
That is the story. Mr. Buffett takes an axe to it. "Ben Graham managed a hedge fund in the mid-1920s," he wrote. How do we know it was a hedge fund? Because it had all the characteristics later thought remarkable in Jones' vehicle: "partnership structure, a percentage-of-profits-compensation arrangement for Ben as general partner, a number of limited partners, and a variety of long and short positions."
Mr. Buffett didn't claim that he has replaced one putative founder with another. "Incidentally," his letter concluded, "I make no claim that Ben's … partnership was the first. It's just the first that I know of."
Mr. Buffett also isn't the first to express skepticism about the usual story. Charles Gradante, a managing partner of Hennessee Hedge Fund Advisory Group, New York, sought to put Mr. Jones' role in the context of earlier long/short equity strategies by investment banks, when he testified to the Senate Banking Committee in July 2004. But even there, Mr. Gradante acknowledged Mr. Jones' priority as the first to work the long/short equity approach within a limited partnership. Mr. Buffett's iconoclasm, then, went a bit further than Mr. Gradante's as it denied precisely that.
The broadest lesson one might draw from this is that there is a very deep human tendency to condense long and complicated evolutionary stories into unique revolutionary moments—to condense a critically important man's reputation for integrity into a single childhood moment, or the development of new investment forms of asset management into a journalistic "aha," or for that matter to imagine that the long-standing awareness of the spheroid character of the earth came about through one navigational coup in 1492.
There is another deep human tendency to debunk those acts of mythic condensation.