The First Hedge Fund
commoncog.com
commoncog.com
If you want to work in IB, then you basically need to go to a feeder school or have connections. The investment business is a lot of "look, we have the smartest people in the room to handle your money, trust us." They rely, like consulting, on selling the prestige of their employees education and social capital. You will sign on to working absurd hours, with the promise of making a lot of $$$ if you can survive (literally, a guy died this year at BofA).
If you want to trade your best bet is apply for roles at prop shops and funds and avoid banks entirely
We were renamed market makers and carried on for a bit.
Before him, if you wanted to make a negative bet on a stock you could really only do it with spread betting.
Jacob Little was a giant Wall Street shorter in the 1830s.
During the US bull market of the 1920s, there were numerous private investment vehicles available to wealthy investors. Of that period, the best known today is the Graham-Newman Partnership, founded by Benjamin Graham and his long-time business partner Jerry Newman. This was cited by Warren Buffett in a 2006 letter to the Museum of American Finance as an early hedge fund, and based on other comments from Buffett, Janet Tavakoli deems Graham's investment firm the first hedge fund.
The sociologist Alfred W. Jones is credited with coining the phrase "hedged fund" and is credited with creating the first hedge fund structure in 1949. Jones referred to his fund as being "hedged", a term then commonly used on Wall Street to describe the management of investment risk due to changes in the financial markets.
In other words, it depends on who you ask and what your exact understanding is of what defines a hedge(d) fund.
https://en.m.wikipedia.org/wiki/Edward_O._Thorp
He wrote a book this great book:
https://www.amazon.com/Man-All-Markets-Street-Dealer/dp/0812...
He’s almost 92 and still around. Here’s a 2022 Tim Ferriss interview:
I don’t think a young Ken Griffin of today would get that same access.
https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...
"Why We Never Use the Black Scholes Equation" - https://youtu.be/UoGlUZPNouM
It will not work today. For starters, it makes a bunch of simplifying assumptions. And there are better models. It also misses a number of important dynamics.
https://www.amazon.com/When-Genius-Failed-Long-Term-Manageme...
Isn't there some quote from Warren Buffett about simple index fund investment typically beating hedge funds? Hedge funds' attempts at micromanaging risk gets in the way of simple compounding.
Disclaimer - it's a thought I got from watching The Big Short, which portrayed Mark Baum as a sort of investigative journalist in a hedge fund manager's clothes. He takes a lead from a source, investigates a thesis, talks to primary sources, and drops his findings in public. More compellingly, he appears to gain access to meetings and people that ordinary journalists wouldn't, simply because he's seen as part of the system.
But unlike a regular investor, who can be tempted to call a spade a forklift if it meant that it would drive up the price, Baum's money comes from betting against the system. His "journalistic" pursuit of reality is motivated by skin in the game, as opposed to institutionalised bias.
Of course, the motivations behind journalists and hedge funds appear different, and the incentive for truth can vary too. But since so much of journalism is hostage to its financial model (advertising), it's arguable that there's little difference in key aspects. If your goal is to make money, and the means by which you make money affect your version of reality, then it's a comparison between apples.
Since hedge funds are incentivised to protect their investments against looming bear markets, they are also incentivised to see past the frothing-at-the-mouth hype that accompanies bull markets. Which I see as a mirror of the journalistic idea of speaking truth to power.
I am interested in any systems that can lead to people seeking out and producing high-definition versions of reality. Journalism is but one system, and it has no monopoly on this pursuit. The world comprises many such systems. I feel hedge funds could be considered one of them.
That the "first" (debatable) hedge fund was started by a journalist seems more than a coincidence.
https://archive.ph/https://www.bloomberg.com/opinion/article...
edit: in fact he talked about literally a hedge fund doing journalism in today's entry:
Cue eyeroll. This triggered a rant in me. We really shouldn't be giving so much money to these people. But the problem is that we individually don't have much control over the matter because the majority of their clients are large pension funds, endowments, sovreign wealth funds, and government managers of social security, which themselves are managed by... managers who have an incentive to hand off the risk of being fired for poor performance to someone else. Very few clients are actually high net worth individuals who trust the skill of the hedge fund manager.
And indeed, most of them have no skill whatsoever. Hedge funds are, for a large part, part of a parasite economy, where large sums of money are diverted from astronomical sums of money without many people noticing.
I'd check your assumptions. The vast majority of hedge fund clients are high net worth individuals, with very few pension clients for the typical hedge fund. You might be right about the skill assertion but no one is being taken advantage of.
Hege fund clients are almost all high net worth individuals who are very capable of making their own financial decisions. Even pensions that do allocate to hedge funds are such a small portion of the pension holdings. PE is probably a larger portion than hedge funds.
Think about it for a second. There are a very few finite number of pension funds and a relatively huge number of high networth clients.
I don't know which fund you work for to get your insight but you are incorrect in yoru assumptions:)
This is just blatantly false. The majority of clients are large institutions. FYI I used to work for one.
Well atleast we got you to move the goal posts from pension funds to large institutions but again think about the average hedge fund.
The average hedge fund is 3 people and about $25M in money. What kind of institutional money do you think they'll raise? That's right, about zero and their capital will be their own and friends/ family and one or two anchor clients.
Again with thousands of hedge funds and very few pension funds how could the majority of clients be pensions?
Your assertion doesn't seem to pass a quick sanity test:)
> the majority of their clients are large pension funds, endowments, sovreign wealth funds, and government managers
You said:
> The vast majority of hedge fund clients are high net worth individuals
"large pension funds, endowments, sovreign wealth funds, and government managers" are not high net worth individuals, by definition. You're just talking past each other (or you stopped reading after the first item of the list).
The US alone already has around 5000 defined benefits pension funds. (The smaller ones probably invest via fund-of-funds, rather than directly as a LP.)
[Citation Needed], especially if we're already at the point where people are being told to check their assumptions.
One possible charitable explanation is that OP is talking about majority by assets, whereas you're talking about majority by identity.
This is definitely not the case if you are talking in terms of the % of AUM. For all the hedge funds that I know about the vast majority of their AUM comes from institutional clients like pension funds.
For big hedge funds even by number of investors the majority is probably institutions because they don't encourage individual clients and instead target their marketing at institutions so they can raise more AUM.
Source: worked in the securities division of a major wall st firm for 8 years and had a lot of hedge fund clients, then worked for a hedge fund startup. Have close friends who have launched 2 hedge funds and have seen the whole process for them including cap intro etc. Worked at a software company where one of my clients was one of the largest hedge funds in the world so spent a bunch of time embedded onsite at that fund.
That is very, very wrong. HNW have to small tickets to be interesting for most hedge funds, where the minimum ticket size is around $10M. The KYC is also much more complicated for invividuals, risk profiles are generally not aligned, and overall most individuals are not sophisticated enough to be a good fit as client. I say that after close to 20 years in the HF industry, and 2 partners positions...
I would estimate the ratio to be 95/5 for institutional/individual.
> Think about it for a second. There are a very few finite number of pension funds and a relatively huge number of high networth clients.
There is actually a a really large pool of pension funds, funds of funds, and overall institutional investors out there. Basically most schools have endowments funds, every groupment of companies will have a fund for their employees, there's all the insurance companies, the state / countries pension funds, all the various banks and wealth managers, etc.
> Hege fund clients are almost all high net worth individuals who are very capable of making their own financial decisions
Definitely not. Most HF have specific risk profiles and/or characteristics, that are not suited for individuals. Most HNW go to CTAs instead which are much easier to understand and advertise.
Someone has to figure out the mechanics of taking that money and investing it. Who would you propose does that? And what do you think is a fair share for that job? If you think the Hedge funds fees are too high? Fine, take your money out of whatever hedge fund and stick it in SPY or pick stocks yourself, but there's good reasons you wouldn't want to do that.