[HN Gopher] The First Hedge Fund
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The First Hedge Fund
Author : nsoonhui
Score : 114 points
Date : 2024-06-25 00:23 UTC (22 hours ago)
(HTM) web link (commoncog.com)
(TXT) w3m dump (commoncog.com)
| mjfl wrote:
| > It was started in 1949 by a middle-aged journalist with a
| masters in sociology and little-to-no investing experience.
|
| Cue eyeroll. This triggered a rant in me. We really shouldn't be
| giving so much money to these people. But the problem is that we
| individually don't have much control over the matter because the
| majority of their clients are large pension funds, endowments,
| sovreign wealth funds, and government managers of social
| security, which themselves are managed by... managers who have an
| incentive to hand off the risk of being fired for poor
| performance to someone else. Very few clients are actually high
| net worth individuals who trust the skill of the hedge fund
| manager.
|
| And indeed, most of them have no skill whatsoever. Hedge funds
| are, for a large part, part of a parasite economy, where large
| sums of money are diverted from astronomical sums of money
| without many people noticing.
| chollida1 wrote:
| > . Very few clients are actually high net worth individuals
| who trust the skill of the hedge fund manager.
|
| I'd check your assumptions. The vast majority of hedge fund
| clients are high net worth individuals, with very few pension
| clients for the typical hedge fund. You might be right about
| the skill assertion but no one is being taken advantage of.
|
| Hege fund clients are almost all high net worth individuals who
| are very capable of making their own financial decisions. Even
| pensions that do allocate to hedge funds are such a small
| portion of the pension holdings. PE is probably a larger
| portion than hedge funds.
|
| Think about it for a second. There are a very few finite number
| of pension funds and a relatively huge number of high networth
| clients.
|
| I don't know which fund you work for to get your insight but
| you are incorrect in yoru assumptions:)
| mjfl wrote:
| > Hege fund clients are almost all high net worth individuals
| who are very capable of making their own financial decisions
|
| This is just blatantly false. The majority of clients are
| large institutions. FYI I used to work for one.
| chollida1 wrote:
| > The majority of clients are large institutions.
|
| Well atleast we got you to move the goal posts from pension
| funds to large institutions but again think about the
| average hedge fund.
|
| The average hedge fund is 3 people and about $25M in money.
| What kind of institutional money do you think they'll
| raise? That's right, about zero and their capital will be
| their own and friends/ family and one or two anchor
| clients.
|
| Again with thousands of hedge funds and very few pension
| funds how could the majority of clients be pensions?
|
| Your assertion doesn't seem to pass a quick sanity test:)
| throwup238 wrote:
| They didn't move the goalposts. They said (originally):
|
| _> the majority of their clients are large pension
| funds, endowments, sovreign wealth funds, and government
| managers_
|
| You said:
|
| _> The vast majority of hedge fund clients are high net
| worth individuals_
|
| "large pension funds, endowments, sovreign wealth funds,
| and government managers" are not high net worth
| individuals, by definition. You're just talking past each
| other (or you stopped reading after the first item of the
| list).
| tingletech wrote:
| I'm pretty sure my pension has holdings in around 100
| hedge funds -- but it has more allocated to private
| equity and real estate. The endowment has more in hedge
| funds than the pension iiuc, but in basically the same
| funds. The investment office also announced last year
| that it is going to divest from hedge funds and re-
| allocate that to private credit. The chief investment
| officer said the hedge funds didn't proved any hedge in
| 2000, 2008, or 2020.
| em500 wrote:
| > Again with thousands of hedge funds and very few
| pension funds how could the majority of clients be
| pensions?
|
| The US alone already has around 5000 defined benefits
| pension funds. (The smaller ones probably invest via
| fund-of-funds, rather than directly as a LP.)
| smabie wrote:
| this isn't even remotely true
| Terr_ wrote:
| > I'd check your assumptions. The vast majority of hedge fund
| clients are high net worth individuals
|
| [Citation Needed], especially if we're already at the point
| where people are being told to check their assumptions.
|
| One possible charitable explanation is that OP is talking
| about majority _by assets_ , whereas you're talking about
| majority _by identity_.
| seanhunter wrote:
| > The vast majority of hedge fund clients are high net worth
| individuals, with very few pension clients for the typical
| hedge fund.
|
| This is definitely not the case if you are talking in terms
| of the % of AUM. For all the hedge funds that I know about
| the vast majority of their AUM comes from institutional
| clients like pension funds.
|
| For big hedge funds even by number of investors the majority
| is probably institutions because they don't encourage
| individual clients and instead target their marketing at
| institutions so they can raise more AUM.
|
| Source: worked in the securities division of a major wall st
| firm for 8 years and had a lot of hedge fund clients, then
| worked for a hedge fund startup. Have close friends who have
| launched 2 hedge funds and have seen the whole process for
| them including cap intro etc. Worked at a software company
| where one of my clients was one of the largest hedge funds in
| the world so spent a bunch of time embedded onsite at that
| fund.
| Galanwe wrote:
| > The vast majority of hedge fund clients are high net worth
| individuals, with very few pension clients for the typical
| hedge fund.
|
| That is very, very wrong. HNW have to small tickets to be
| interesting for most hedge funds, where the minimum ticket
| size is around $10M. The KYC is also much more complicated
| for invividuals, risk profiles are generally not aligned, and
| overall most individuals are not sophisticated enough to be a
| good fit as client. I say that after close to 20 years in the
| HF industry, and 2 partners positions...
|
| I would estimate the ratio to be 95/5 for
| institutional/individual.
|
| > Think about it for a second. There are a very few finite
| number of pension funds and a relatively huge number of high
| networth clients.
|
| There is actually a a really large pool of pension funds,
| funds of funds, and overall institutional investors out
| there. Basically most schools have endowments funds, every
| groupment of companies will have a fund for their employees,
| there's all the insurance companies, the state / countries
| pension funds, all the various banks and wealth managers,
| etc.
|
| > Hege fund clients are almost all high net worth individuals
| who are very capable of making their own financial decisions
|
| Definitely not. Most HF have specific risk profiles and/or
| characteristics, that are not suited for individuals. Most
| HNW go to CTAs instead which are much easier to understand
| and advertise.
| SilverBirch wrote:
| I'd like to know what you're proposing as an alternative. There
| are savings, we want to take those savings and give them to
| businesses to invest and grow and then share in the profits.
| This is good for the investor and for the business and as a
| result for the economy in general. It's literally a positive
| sum game - there may be inequality in society, but in general
| _everyone_ is getting richer over time.
|
| Someone has to figure out the mechanics of taking that money
| and investing it. Who would you propose does that? And what do
| you think is a fair share for that job? If you think the Hedge
| funds fees are too high? Fine, take your money out of whatever
| hedge fund and stick it in SPY or pick stocks yourself, but
| there's good reasons you wouldn't want to do that.
| mjfl wrote:
| I think the average person should, in fact, do what my former
| manager at the hedge fund advised me to do with my own money,
| just put it in a low cost index fund that tracks the S&P.
| qigtyofhp wrote:
| The story was interesting but the title is misleading. This
| wasn't the first hedge fund. Benjamin Graham started his first
| fund in the 1920s which would be what we call a hedge fund today.
| Graham's fund might not be the first hedge fund but it came
| before Jones'.
| seanhunter wrote:
| That is exactly what I was going to post.
| matco11 wrote:
| Jones' is normally referred to as the first hedge fund because
| he used/invented shorting.
|
| Before him, if you wanted to make a negative bet on a stock you
| could really only do it with spread betting.
| kasey_junk wrote:
| That's not true. Shorting equities goes back to the East
| Indies Company and is often blamed for crises going back at
| least to the late 1700s.
|
| Jacob Little was a giant Wall Street shorter in the 1830s.
| hristov wrote:
| The answer is that aw jones was the first to use the long
| short hedging strategy. That is why his fund is called a
| hedge fund and is considered the first of its kind. Others
| have used shorting before but he was the first to use the
| strategy of specifically entering a short position to
| protect a different long position. Well, he was the first
| one to officially theorize it and market it, at least. That
| is why when carol loomis described his fund, she coined the
| word hedge fund.
| em500 wrote:
| Straight from wikipedia[1]:
|
| _During the US bull market of the 1920s, there were numerous
| private investment vehicles available to wealthy investors. Of
| that period, the best known today is the Graham-Newman
| Partnership, founded by Benjamin Graham and his long-time
| business partner Jerry Newman. This was cited by Warren Buffett
| in a 2006 letter to the Museum of American Finance as an early
| hedge fund, and based on other comments from Buffett, Janet
| Tavakoli deems Graham 's investment firm the first hedge fund._
|
| _The sociologist Alfred W. Jones is credited with coining the
| phrase "hedged fund" and is credited with creating the first
| hedge fund structure in 1949. Jones referred to his fund as
| being "hedged", a term then commonly used on Wall Street to
| describe the management of investment risk due to changes in
| the financial markets._
|
| In other words, it depends on who you ask and what your exact
| understanding is of what defines a hedge(d) fund.
|
| [1] https://en.wikipedia.org/wiki/Hedge_fund#History
| vishnugupta wrote:
| This reminds me of a story (I don't know the authenticity of
| it) where someone before Black-Scholes had invented the Black-
| Scholes model but didn't publish rather they were making ton of
| money by putting it to work.
| melling wrote:
| That would be Ed Thorp.
|
| https://en.m.wikipedia.org/wiki/Edward_O._Thorp
|
| He wrote a book this great book:
|
| https://www.amazon.com/Man-All-Markets-Street-
| Dealer/dp/0812...
|
| He's almost 92 and still around. Here's a 2022 Tim Ferriss
| interview:
|
| https://youtu.be/gs39QFYIbBY?si=mEABrrb7yDwHR6sK
| testval123 wrote:
| It's also interesting that Thorp met a young Ken Griffin
| and gave him some advice/materials in starting out.
|
| I don't think a young Ken Griffin of today would get that
| same access.
| belter wrote:
| Doubt it. If you go to market with Black-Scholes you will
| lose money.
|
| https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d.
| ..
|
| "Why We Never Use the Black Scholes Equation" -
| https://youtu.be/UoGlUZPNouM
| belter wrote:
| "Warren Buffett: Black-Scholes Formula Is Total Nonsense" -
| https://youtu.be/H4X-4e7fPgI
| dev-ns8 wrote:
| There's also a great story that speaks more towards the
| detriment of using Black-Scholes as an investment thesis.
|
| https://www.amazon.com/When-Genius-Failed-Long-Term-
| Manageme...
| rishab1 wrote:
| Great article!
| steveBK123 wrote:
| One part of this story that is new to me is that he sort of
| invented an early version of the modern pod shop. Of course he
| wasn't operating it with the same risk management discipline, but
| still interesting.
| pnetherwod wrote:
| I've been ruuning a hedge fund for 20 years. The type of client
| depends entirely on size. Most funds start small with friends and
| family money. Some start bigger like ex prop traders. Before the
| Volker rule many traders worked for banks known as prop traders
| (proprietary). The Volker Rule stopped that but prop traders thar
| had built up a decent track record could leave the bank and set
| up a fund and take they clients with them. Many of these would be
| banks clients which include HNW and family offices. Typically any
| fund under $100m under management would not have big
| institutional clients like pension funds. Fund of Funds (FOF)
| used to be a big part of the business but less so today. They
| used to reply on the fact that due diligence was hard and access
| limited. It's not the case today. So sub $10m is mainly the
| managers own money and friends and family. Sub $100m you may some
| HMW and family office and possibly a FOF. Post $100m you can
| start to attract interest of some of the more adventurous
| institutional investors. After PS500 you're definitely in the
| institutional category. Institutions don't want to invest in
| small managers because they need to invest in size otherwise is
| not worth their effort but they also don't want to be your entire
| assets either hence the minimums. Once Institutions start coming
| in in size then asset levels can really accelerate as the aren't
| that many funds that are very large so they have a limited
| choice. So what type of client to have is entirely dependant on
| your size. In fact it's more dependant on your size than your
| returns. In the early days to have to be a bit racy to generate
| the interest. As soon as to get bigger to need to calm things
| down a bit.
| vmsp wrote:
| How does one get into the investment business?
| beezlebroxxxxxx wrote:
| The comment you're replying to laid it out pretty clearly if
| you want to be a part of a hedge fund (as I interpret your
| question.) Know friends and family with money (a lot,
| hopefully) or, more commonly, have institutional connections.
| Have at least some connections and experience in
| finance/banking/investing (at a large scale, not small-fry
| stuff). Bring the two together with _a lot_ of marketing and
| promises.
|
| If you want to _work_ in IB, then you basically need to go to
| a feeder school or have connections. The investment business
| is a lot of "look, we have the smartest people in the room
| to handle your money, trust us." They rely, like consulting,
| on selling the prestige of their employees education and
| social capital. You will sign on to working absurd hours,
| with the promise of making a lot of $$$ if you can survive
| (literally, a guy died this year at BofA).
| smabie wrote:
| Working in IB isn't related at all to actually making
| investments / trading though.
|
| If you want to trade your best bet is apply for roles at
| prop shops and funds and avoid banks entirely
| mtillman wrote:
| Internship at a fund/CTA/market maker/wholesale bank. If
| older, go in through an ops position. Don't spend time at a
| retail bank.
| pnetherwod wrote:
| It depends what you want to do. Portfolio manager and quant
| research roles are rare and highly competitive but other
| roles in risk, ops or compliance are more common. It's an
| insiders market for sure.
| JumpCrisscross wrote:
| > _Volker Rule stopped that_
|
| We were renamed market makers and carried on for a bit.
| hchak wrote:
| I'm pretty glad that these types of articles get upvoted to the
| top.
| thedudeabides5 wrote:
| the first hedge fund was a boat or an ox cart
| instagraham wrote:
| Interesting read, but I found this a missed opportunity to link
| AW Jones' journalistic background to some of the journalistic
| elements behind running a hedge fund.
|
| Disclaimer - it's a thought I got from watching The Big Short,
| which portrayed Mark Baum as a sort of investigative journalist
| in a hedge fund manager's clothes. He takes a lead from a source,
| investigates a thesis, talks to primary sources, and drops his
| findings in public. More compellingly, he appears to gain
| _access_ to meetings and people that ordinary journalists wouldn
| 't, simply because he's seen as part of the system.
|
| But unlike a regular investor, who can be tempted to call a spade
| a forklift if it meant that it would drive up the price, Baum's
| money comes from betting _against_ the system. His
| "journalistic" pursuit of reality is motivated by skin in the
| game, as opposed to institutionalised bias.
|
| Of course, the motivations behind journalists and hedge funds
| appear different, and the incentive for truth can vary too. But
| since so much of journalism is hostage to its financial model
| (advertising), it's arguable that there's little difference in
| key aspects. If your goal is to make money, and the means by
| which you make money affect your version of reality, then it's a
| comparison between apples.
|
| Since hedge funds are incentivised to protect their investments
| against looming bear markets, they are also incentivised to see
| past the frothing-at-the-mouth hype that accompanies bull
| markets. Which I see as a mirror of the journalistic idea of
| speaking truth to power.
|
| I am interested in any systems that can lead to people seeking
| out and producing high-definition versions of reality. Journalism
| is but one system, and it has no monopoly on this pursuit. The
| world comprises many such systems. I feel hedge funds could be
| considered one of them.
|
| That the "first" (debatable) hedge fund was started by a
| journalist seems more than a coincidence.
| empath75 wrote:
| If you read Matt Levine's blog he talks about this quasi-
| journalistic short selling model a lot -- here's a good example
| -- you can follow the links to find more:
|
| https://archive.ph/https://www.bloomberg.com/opinion/article...
|
| edit: in fact he talked about literally a hedge fund doing
| journalism in today's entry:
|
| https://archive.ph/vwCQn
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