Business and Labor

Alfred Winslow Jones, The Unlikely Inventor of the Hedge Fund

Alfred Winslow Jones had been a spy, a sociologist, a magazine writer and a Communist before he invented the modern hedge fund in 1949.

He began investing $100,000 from a shabby office on Broad Street near the New York Stock Exchange. When he died at his home in Redding, Conn., he was worth many, many, many times that.

People who caught on to his methods and adopted them also made king’s ransoms. And after wresting their profit from their lightly regulated activities, they paid lower taxes than their secretaries did – another Alfred Winslow Jones innovation.

Financial journalist Sebastian Mallaby called him an ‘unlikely Wall Street patriarch.”

Alfred Winslow Jones

He was, noted Mallaby, "an erudite dandy, a onetime Marxist who hiked to the frontlines of the Spanish Civil War with the writer Dorothy Parker—where they shared a bottle of Scotch whisky with Ernest Hemingway.”

Alfred Winslow Jones was born Sept. 9, 1900, in Australia, the son of a General Electric executive. At four his family moved to Schenectady, N.Y., the home of a large GE manufacturing facility.

Like his father, he graduated from Harvard, but unlike his father he didn’t go into business. He got a job as a purser on a tramp steamer. He worked as a statistician for an investment house for a little while, but tired of it. Then he took the Foreign Service exam, and got posted to Berlin.

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Alfred Winslow Jones, from his Harvard yearbook

From Berlin he reported to the State Department on the rise of Hitler, but he secretly married a left-wing Jewish socialite named Anna Block. Jones then quit the State Department, stayed in Germany under an assumed name and studied at the Marxist Workers School. He also spied for a left-wing group called the Leninist Organization. His clandestine activities may have trained him to operate under the radar on Wall Street.

Back in the USA

Alfred Winslow Jones’ marriage lasted only a few months. He returned to the United States and enrolled in Columbia University, where he studied for his PhD in sociology. He married again, this time to Mary Carter. The newlyweds took their honeymoon in Spain during the Spanish Civil War, and Jones reported on civilian relief for representatives of the American Friends Service Committee, a Quaker peace group.

They hitchhiked across Spain, met up with Parker and Hemingway and, according to some sources, worked for the OSS, the forerunner of the CIA.

They returned home so he could write his thesis, an analysis of labor unrest in an Akron, Ohio, rubber plant. Jones wanted to figure out if fascism could take hold in the United States. He had assistants conduct 1,700 field interviews, which he analyzed statistically. His thesis, Life, Liberty and Property, A Story of Conflict and a Measurement of Conflicting Rights, concluded it could not.

Fortune, a fledgling business magazine, printed part of the thesis and hired him as a staff writer. Eventually he wrote an essay for Fortune on forecasting the stock market, arguing that investor psychology drives the market's rise and fall.

The article gave him an idea.

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Wall Street

In 1949, the names ‘Fidelity’ and ‘Prudential’ embodied the virtues associated with money managers: sober, prim, formal and conservative. Certainly not a 48-year-old ex-communist who used to drink whiskey in a war zone with Ernest Hemingway.

But Alfred Winslow Jones founded A.W. Jones with $40,000 of his own money and $60,000 from friends. His investor friends included Louis Fischer, a former Communist who wrote a biography of Vladimir Lenin, and Sam Stayman, a textile executive and famous bridge player.

Jones described his fourth career choice as managing a ‘hedged fund.’ His big idea was to reduce risk by buying stocks he believed would rise and short selling stocks he believed would fall.

Alfred Winslow Jones had some other ideas as well.

Clandestine Operation

Drawing, perhaps, on his experience as a spy he created his firm as a partnership to avoid regulation. He didn’t register his fund, nor did he advertise it.

In his obituary, the New York Times wrote,

Mr. Jones preferred to remain almost invisible. 'Hedging,' he once said, 'is a speculative tool used to conservative ends,' but he did not as a rule discuss what he did, let alone how he did it.

He also borrowed money to leverage his bets that certain stocks would rise.  And he invented the 20 percent plus two percent performance fee, in which fund managers received a share of profit rather than salary.

Jones claimed his fee structure had to do with the way Phoenician merchant ships kept 20 percent of profits from a successful voyage. The real reason: so the IRS would tax their profit at the capital gains rate of 25 percent, rather than at the top marginal rate (at the time) of 91 percent.

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The New York Stock Exchange

Big Daddy

By 1966, a number of hedge funds imitated Jones’ methods on a small scale, according to Fortune. New York magazine in 1968 called him the "big daddy" of the hedge fund business in a story, The Jones Nobody Keeps Up With.

In 20 years he had a cumulative return of 5000 percent, and over 34 years his investors lost money in only three.

He had several homes, on tony Sutton Place in Manhattan and in Redding, Conn., where he liked to garden. International affairs lured him away from the office; at times he would take leave to work on summer projects for the Peace Corps.

Alfred Winslow Jones eventually untangled himself from the business and devoted himself to the Peace Corps. He tried to create a reverse Peace Corps in which people from poor countries would come to aid the poor in the United States. It would be a hedge against creating a sense of inferiority among poor nations.

Alfred Winslow Jones died at his home on Poverty Hollow Road in Redding on June 2, 1989. A.W. Jones is still in business.

With thanks to More Money Than God: Hedge Funds and the Making of a New Elite, by Sebastian Mallaby.

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