Origins of Hedge Funds: From Gamblers to Innovators in Asset Management

Have you ever wondered if Hedge Fund Managers are closet gamblers?

Well, the story behind the origins of hedge funds might just surprise you then.

The first hedge fund was built using the sophisticated techniques used by seasoned gamblers to hedge their bets.

The first hedge fund was built by the American investment manager Alfred Winslow Jones. He referred to his firm as a ‘hedged fund’. Indicating that he had set limits on his bets to protect his downside.

Jones’s key insight was that a fund manager could combine two techniques: buying stocks with leverage and selling short other stocks. While each technique was considered risky and highly speculative, their combination would result in a conservative portfolio from a risk perspective.

The expectation was that it would outperform the markets and deliver outsized returns while mitigating risk.

When faced with the dilemma of how he should be paid for his efforts, he took inspiration from ancient Phoenician Sea captains, who would pay themselves 20% of the profit from a successful voyage.

These methods were so successful that they are still used by hedge funds today.

I find this story fascinating because Jones showed creativity by being able to take ideas from gamblers and sea captains and applying them to traditional asset management.

This ingenuity is becoming increasingly relevant as we witness the birth of multiple new markets over the past decade, ranging from crypto to AI.

Designing services in these new markets needs deep understanding of the markets as well as inspiration from other sources.

For example, devising the economics behind crypto token could benefit from experiences in more traditional financial markets such as capital raising and book running for equity IPO’s.

With the wide experience of me and my colleagues at Asia SGE we are confident that the insights we have gathered over the years guiding startups and founders can be applied to the emerging crypto space, and with the right creativity other industries as well.