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Comment by qigtyofhp | Hacker News Reader

The story was interesting but the title is misleading. This wasn't the first hedge fund. Benjamin Graham started his first fund in the 1920s which would be what we call a hedge fund today. Graham's fund might not be the first hedge fund but it came before Jones'.

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Straight from wikipedia[1]:

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.

[1] https://en.wikipedia.org/wiki/Hedge_fund#History

This reminds me of a story (I don’t know the authenticity of it) where someone before Black-Scholes had invented the Black-Scholes model but didn’t publish rather they were making ton of money by putting it to work.

That would be Ed Thorp.

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:

https://youtu.be/gs39QFYIbBY?si=mEABrrb7yDwHR6sK

It’s also interesting that Thorp met a young Ken Griffin and gave him some advice/materials in starting out.

I don’t think a young Ken Griffin of today would get that same access.

Doubt it. If you go to market with Black-Scholes you will lose money.

https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&d...

"Why We Never Use the Black Scholes Equation" - https://youtu.be/UoGlUZPNouM

"Warren Buffett: Black-Scholes Formula Is Total Nonsense" - https://youtu.be/H4X-4e7fPgI

You would make money because the other tools in use at the time were much worse and people were pricing options poorly. So plenty of opportunities. Hence why Ed thorp did well.

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.

There's also a great story that speaks more towards the detriment of using Black-Scholes as an investment thesis.

https://www.amazon.com/When-Genius-Failed-Long-Term-Manageme...

Jones’ is normally referred to as the first hedge fund because he used/invented shorting.

Before him, if you wanted to make a negative bet on a stock you could really only do it with spread betting.

That’s not true. Shorting equities goes back to the East Indies Company and is often blamed for crises going back at least to the late 1700s.

Jacob Little was a giant Wall Street shorter in the 1830s.

The answer is that aw jones was the first to use the long short hedging strategy. That is why his fund is called a hedge fund and is considered the first of its kind. Others have used shorting before but he was the first to use the strategy of specifically entering a short position to protect a different long position. Well, he was the first one to officially theorize it and market it, at least. That is why when carol loomis described his fund, she coined the word hedge fund.

That is exactly what I was going to post.

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