Institutional Investor's Alpha Magazine - June 2008 - (Page 69)

ALFRED W JONES ALPHA HALL OF FAME . tions. Another illusion is that short-selling is somehow more dangerous than buying a stock for a rise in price. A stock can theoretically go up to inﬁnity and down only to zero . . . and in both cases there is no danger that cannot be provided for by adequate diversiﬁcation.” — Alfred Winslow Jones, “A Basic Report to the Partners,” May 31, 1961 Robert Burch III, president of A.W. Jones & Co.: “The ﬁ rst thing Alfred would say about hedge fund managers today is that they are not hedged. The word is being abominated. Anybody leveraged 30 to one is not hedged — they’re just using the word to get the 20 percent performance fee. It’s false advertising. That’s the ﬁ rst thing he’d say. Then he’d go to his socialistic bent and ask, ‘What are they doing with all that money?’ He’d be pleased that foundations and endowments are up to their elbows in hedge funds. He had two powerful ideas. One was that you didn’t need the traditional allocation of bonds and cash and all that — you can go 99 percent stocks, you’ll get a bigger return. Two was that you stay in there, you hang in there because you’re hedged. Those were his two things: always being in the market and having a big percentage of assets in stock. Alfred always said just pick the best guys, but he wanted talent to prove itself. He’d give them a paper portfolio, see how they did and in the process get good ideas himself. If you wanted to work for Alfred, he’d say, ‘Fine, do a million-dollar portfolio and let’s see how you do — and make sure you’ve got plenty on the short side.’ Because the ability to short was where you separated the wheat from the chaff. The years 1949 to 1970 were huge for Alfred. The Dow was 160 in the summer of ’49! It rose to over 1,000 by 1970, and he was participating in it the whole time.” — Interview by Karl Cates lfred Winslow Jones, more academician than investor, founded the ﬁrst hedge fund in 1949, fashioning it around core tenets that persist to this day. A ﬁerce believer in (reasonable) leverage, he preached (and practiced) the gospel of long-short stock portfolios. He charged a 20 percent performance fee — unheard of in its time, though standard today — justifying it with a piece of captains’ lore from antiquity: Phoenician sailing ships, he was fond of saying, claimed 20 percent of a cargo if they delivered it safely to port. Hard-driving hedge fund managers, he deemed, deserved no less. Jones, who had earned a Ph.D. in sociology from Columbia University in 1941, worked as an editor and writer for Fortune magazine before switching careers at 48. He opened A.W. Jones & Co. with $100,000 pooled from his own pocket and those of four friends. By 1961, when he wrote a professorial letter (excerpted here) to his ﬁrm’s limited partners explaining his strategy, annual returns at the ﬁrm had averaged 20.9 percent, a pace he maintained until his death in 1989 at the age of 88. Part of his strength was in recognizing his own limitations: Jones was known for hiring savvy stock pickers. A.W. Jones & Co. operates today as a $250 million, New York–based fund of funds run by his son-in-law, ﬁrm president Robert Burch III. “Hedging constitutes the most important of the unique features of our investment method in that we make use of short sales for the control of stock market risk and for actual capital appreciation of our fund in a declining stock market. Hedging, that is, the taking of both long and short positions, makes our fund more stable and conservative than the ordinary forms of common stock investment; and the borrowing of additional money, protected by hedging, permits the most efﬁcient use of our capital, without additional market risk. . . . In this early emphasis on hedging, we risk obscuring our chief aim, which is long-term capital appreciation through the buying and holding of good common stocks. There are many illusions about short-selling. One is that the practice is immoral or antisocial. Actually, the successful short-seller is performing a useful market function in that he arrests an unjustiﬁed rise in a stock by selling it and then later cushions its fall by buying it back, thus moderating its ﬂuctua- “There are many illusions about shortselling. One is that the practice is immoral or antisocial. ALFRED W. Another JONES is that it’s dangerous.” Photographs courtesy of the Jones Family. JUNE 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 69

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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