A.W. Jones's Hedge Fund Innovation

A story about how A.W. Jones created the first hedge fund by innovating both investment strategy and team structure.

"The guy who invented it was called a hedged fund and his name was Alfred Jones, A.W. Jones. He was a journalist for Fortune. He was researching for an article on stock pickers and found this small group of people doing slightly different stuff with stock picking.

At the time, rich people viewed Wall Street and equity investing as just a way to preserve wealth, not grow wealth. Jones raised $100,000 and did a combination of longing things with borrowed leverage. If he invested $80,000, he would borrow another $50,000, now he's $130,000 into a stock. With the rest of his money, he would buy shorts in a combination where his upside was much higher and downside was protected.

But the really revolutionary part was how he structured his team. He hired young stock pickers and instead of giving them just a salary, he gave them each $50,000 to manage. They could hire their own people and form their own groups. The person who performed worst would be out. He created this cutthroat culture of people just getting after it.

He paid them 20% of future upside, which had tax benefits. He justified it by saying Phoenician sea captains used to keep a fifth of the profits of successful voyages. This team structure changed everything. Prior to that, Wall Street was just this stodgy sleepy place doing 80% stocks, 20% bonds and letting it sit there. Once he changed that incentive structure, everything changed."