Hedge fund industry enters time-warp in January 1970, pops out virtually unchanged in 2008

Nov 27th, 2008 | Filed under: Featured Post, Today's Post | By:
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Thought recent develops in the hedge fund industry such as poor performance, SEC registration, and taxation were unprecedented?  Yeah, so did we – until Nicholas Motson of the Cass Business School (see related post), gave us a heads-up about a fascinating FORTUNE magazine article by Carol Loomis (who went on to enjoy an illustrious career in business journalism and remains a Senior Editor-at-Large with the magazine) from the issue.  The entire article can be downloaded here on the A.W. Jones & Co. website (yes, that A.W. Jones – the father of the hedge fund industry).

As you will see, the similarities between the hedge fund world of 1970 and that of 2008 and truly amazing – almost eerie in fact.  Even the 39 year old Warren Buffett makes a cameo in this piece.  As Motson pointed out to us, “…if you re-scale the numbers it could have been printed yesterday.”

The bizarre parallels begin with the article’s very title: “Hard Times Come to Hedge Funds“.  It goes on to chronicle the travails of the $1 billion industry (as a point of reference, the US mutual fund sector managed about $50 billion at the time).  FORTUNE estimated there were 3,000 investors in about 150 hedge funds by 1970.  Most funds were launched between 1966 and 1970 and “the great bulk” were registered in Manhattan (that’s just south of Greenwich, for those who may not remember the old days).

Trouble in Paradise

FORTUNE described these 3,000 investors as mostly “wealthy…important businessmen.”  Their returns had been good for a few years.  But, wrote the magazine…

“…some today are troubled about their hedge fund investments.  Their misgivings are something new, for until recently, the hedge funds looked like an investor’s dream.  The records they produced were consistently lustrous, and it seemed as if their structure was ideally geared to success.”

“In general, hedge funds were clobbered by the 1969 bear market…The 1969 experience has been a rude awakening for many hedge fund investors and has left some of them with strong reservations about the whole concept.  For the first time in their relatively short history, the funds are not growing; in fact, some have suffered large withdrawals for capital and a few have actually folded.”

“What remains, however, is still a big business, for in the last few years, the hedge funds have both proliferated in number and exploded in size.”

“Hedged Mutual Funds”

In a 2006 paper called “Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds” (see related post) academics Vikas Agarwal, Nicole Boyson, and Narayan Naik wrote that:

“Fairly recently, a number of mutual fund companies have begun offering funds that use hedge fund-like trading strategies designed to benefit from potential mis-pricing on the long as well as the short side.”

But as the January 1970 FORTUNE article points out, the concept actually has a long history.  Wrote FORTUNE:

“…the last couple of years have seen the formation of some  twenty-odd mutual funds that are patterned after the private [hedge] funds and that are commonly also identified as ‘hedge funds’.”

Tiger Children

When disciples of hedge fund legend Julian Robertson left Robertson’s Tiger Management to launch their own funds, the hedge fund community branded them as “Tiger cubs”.  But Robertson wasn’t the first to produce such prodigy.  Reports FORTUNE:

“Because he was running private partnerships, [Alfred] Jones was able to keep the dimensions of his success very quiet, and he had no imitators of any consequence until 1964, when one of his general partners – the first of several to do so – peeled off to start his own fund…These funds are sometimes jokingly referred to as ‘Jones’ children’…”

And as incontrovertible evidence that there are only so many hedge fund names in the world to choose from, two of these “children” were called “Fairfield Partners” and “Cerberus Associates”…

More…

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4 comments
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  1. It is just possible that I read your well-constructed post about FORTUNE’s 1970 hedge fund article with more interest than anyone in the world. I kept looking for the name of the person who wrote that article, but saw only repeated references to the magazine (which I was happy to see as well, since I still write for it). Since you didn’t supply the name, I will.

    Carol Loomis, Senior Editor-at-Large, FORTUNE Magazine

  2. Carol,

    What a distinct pleasure to hear from you. Omitting your name from this piece was a serious oversight. My apologies. This has since been rectified. Naturally, your current perspective on these issues would be of great interest to our readers…

  3. [...] Previous bear market cycles narrowed the field in the past, with the shakeout that followed the late 1960s hedge fund boom being one notable example. Nevertheless, hedge funds continued to thrive and grow in size over [...]

  4. [...] Previous bear market cycles narrowed the field in the past, with the shakeout that followed the late 1960s hedge fund boom being one notable example. Nevertheless, hedge funds continued to thrive and grow in size over [...]

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