Alfred Winslow Jones: Background & bio

Alfred Winslow Jones is the godfather of the hedge fund industry as we know it today.

Born in Melbourne, Australia, during 1901, Alfred Winslow Jones passed away at his home in Redding, Connecticut during June 1989 at the age of 88.

Alfred Winslow Jones moved from Australia to the United States with his family when he was 4.

He graduated from Harvard College in 1923, and, after working as purser on a tramp steamer around the world, he joined the Foreign Service. In the early 1930’s, at the time of Hitler’s rise to power, he was vice consul in Berlin.

After his marriage in 1936 to Mary Carter, he and his wife traveled in Spain during that country’s civil war, reporting on civilian relief for the Quakers. In 1941, he earned a doctorate in sociology at Columbia University. His doctoral thesis, ”Life, Liberty and Property,” a survey of attitudes toward property among different social classes in the United States, was published by Lippincott and became a standard sociology textbook.

From 1941 to 1946, Mr. Jones was an editor at Fortune magazine. His studies of ”Fashions in Forecasting” led him to believe he could do as well as many professional investors. In 1949, he founded one of the first hedge funds with a capital of $100,000–including $40,000 out of his own pocket–and set forth to try to minimize the risk in holding long-term stock positions by short selling other stocks. This investing innovation is now referred to as the classic long/short equities model. Jones also employed leverage in an effort to enhance returns.

Alfred Winslow Jones: The first hedge fund

Alfred Winslow Jones sublet an office near Wall Street for A.W.Jones Partners, the name of his hedge fund.

A.W.Jones Partners differed from its predecessors because the fund could go both long and short the market. What’s more, Jones invented the now standard 2-and-20 hedge fund fee model. There were also several other key differences that separated the A.W.Jones Partners fund from its other peers active at the time.

For example, despite the Securities and Exchange Act of 1933, Jones’ partnership was never registered nor advertised. When more than 99 partners had signed up, Jones set up a new parallel partnership in 1961. However, potential partners were screened. Many were Jones’s intellectual friends like Louis Fischer, who wrote a biography of Lenin.

As I’ve already mentioned, one of the most prominent factors that separated Jones’ fund from the rest of the fund management industry at the time was the fact that A.W.Jones Partners could sell stocks short. In the 1940s and 50s, shorting was simply not done. As Jones wrote to his partners:

“An illusion is that short-selling is somehow more dangerous than buying a stock for a price. A stock can go up to infinity and down only to zero. There is no danger that cannot be provided for by adequate diversification.”

Alfred Winslow Jones also used moderate leverage in his trades, to magnify profits and losses, once again something that other funds rarely did at the time. His worst performance was in the fiscal year to May 31, 1970, when he was 120% invested in a market that was falling and the partnership lost 35.3% (vs, minus 23.4% by the S&P).

Alfred Winslow Jones developed a primitive method to track stock volatility, which he called velocity. This his staff worked out by hand in charts with at least five high or low points. Alfred Winslow Jones’ simply worked out risk against the market as a whole; he distinguished the risk of a particular position from that of the market as a whole, now called alpha and beta. These models were extremely difficult to put together before the widespread use of computers on Wall Street.

In fact, Jones was light-years ahead of both Wall Street practitioners and the academic community in developing an understanding of market risk, as well as the relationship between individual stocks and the market.  Before the academic community had codified the Capital Asset Pricing Model (CAPM) with its notion of Alpha and Beta, Jones had developed his own measure of market risk and how individual stocks related to the market.  Even more astonishing is that he was actively managing the exposure of a risk-adjusted portfolio with this system.

Jones calculated a metric for each stock called Relative Velocity, which is closely related to the CAPM’s Beta (the key difference being the omission of the risk-free rate in the calculation of Velocity).  Relative Velocity was the tendency of a stock, based on historical performance, to move with the S&P 500 to a greater or lesser degree.  Armed with this metric, the firm could then calculate to what extent its long book and short book were correlated with market moves.

And to help him beat the market, Alfred Winslow Jones conned brokers to reveal insider information, inviting brokers to create model portfolios. He rewarded them for the models, but they had no idea what Jones’s firm did. Only in 1966 did Fortune spill the beans in an article by Carol Loomis: “The Jones Nobody Can Keep Up With.”

A.W.Jones Partners’ staff were paid through a position in the investing pool, so their money was taxed as capital gains rather than salary.

During the first 20 years of operation, the A.W Jones Partnership returned just under 5000%. An investment of $10,000 in 1949 was worth $480,000 twenty years later. Jones’s investors lost money in only 3 of his 34 years.

A.W.Jones Partners today

The next significant milestone in the A.W Jones Partnership history occurred in 1983 when Jones’ son-in-law, Robert L. Burch, III became a General Partner. The following year he became Managing Partner and fully transformed the firm into a formalized fund-of-funds structure with no internal managers. This transformation was not a sudden break, but rather the result of the fund’s evolution toward a diversified, multi-manager portfolio. As Burch was making his initial allocations to external managers, he wisely made the largest allocation to a new hedge fund run by his old friend Julian Robertson. Tiger Management would go on to become one of the largest and most successful hedge funds in the world. During the 1980s, Alfred Winslow Jones continued to be available for advice and counsel to the firm until his death in 1989 at age 88.

Today the family tradition continues at A.W. Jones. Jones’ grandson, Robert L. Burch, IV, became a General Partner in 2003 and manages the firm with his father. Remarkably, the operation that started in 1949 with $100,000 in capital has now spawned an investment sector with thousands of funds managing over $1 trillion. A.W. Jones Company continues to invest its partners’ capital in Jones-model, hedged equity funds.

Alfred Winslow Jones: Articles