The first hedge fund was set up by Alfred W. Jones in 1949. Jones wanted to eliminate a part of the market risk involved in holding long stock positions by short-selling other stocks. He thereby shifted most of his exposure from market timing to stock picking. Jones was the first to use short sales, leverage and incentive fees in combination.

In 1952, he converted his general partnership fund into a limited partnership investing with several independent portfolio managers and created the first multi-manager hedge fund. In the mid 1950’s other funds started using the short-selling of shares, although for the majority of these funds the hedging of market risk was not central to their investment strategy.   

In 1966, an article in Fortune magazine about a “hedge fund” run by a certain A. W. Jones shocked the investment community.  Apparently, the fund had outperformed all the mutual funds of it’s time, even after accounting for a hefty 20% incentive fee. The first rush into hedge funds followed and the number of hedge funds increased from a handful to over a hundred within a few years. The bust years following the booming late 1960’s led to high losses and the bankruptcy of many of the more inexperienced fund managers. Michael Steinhardt and George Soros were among those who survived the contractions of 1969-70 and 1973-74.   

The following years were relatively quiet for the industry until 1986, when an article appeared in Institutional Investor magazine reporting on the incredible performance of Julian Robertson’s funds.  The high performance years from 1987 to 1993 helped boost the formation of new hedge funds. More recently, hedge funds have begun to receive many negative headlines in newspapers. The 1992 drop of the British Pound out of the European Currency System was believed to have been caused largely by hedge funds like George Soros’ Quantum Fund although a study published by the International Monetary Fund showed no evidence of market manipulation or higher market volatility caused by hedge funds.  In 1994 many hedge funds had problems coping with the strong increase of U.S. interest rates. The following bond market crash in the U.S. led to substantial losses and a few bankruptcies. The hedge fund industry recovered in 1995 and 1996 and entered a more mature stage.  

About the author:    Dr. Philipp Cottier - Ph.D. University of St. Gallen, Switzerland. Dr. Philipp A.P. Cottier is CIO of Harcourt Investment Consulting AG, a Zurich-based firm providing hedge fund-related specialist advice and customized portfolio management to institutional clients.

Prior to joining Harcourt in 1998, Dr. Cottier was serving as an investment adviser on the investment committees of several of Swiss Bank Corp’s multi-manager hedge funds in Hong Kong and New York. He started his financial career in 1994 in SBC’s futures & options department and subsequently became a hedge fund analyst for the firm. He has diverse international experience, including having worked for the Boston Consulting Group in Sydney.

Dr. Cottier graduated from the University of St. Gallen in 1992 with a Masters in Finance & Accounting and a further Masters in Political Science. He became a Doctor of Finance in 1997 and published his doctoral thesis Hedge Funds and Managed Futures at Paul Haupt Publishers in Bern, Switzerland.





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