I've been ruuning a hedge fund for 20 years. The type of client depends entirely on size. Most funds start small with friends and family money. Some start bigger like ex prop traders. Before the Volker rule many traders worked for banks known as prop traders (proprietary). The Volker Rule stopped that but prop traders thar had built up a decent track record could leave the bank and set up a fund and take they clients with them. Many of these would be banks clients which include HNW and family offices. Typically any fund under $100m under management would not have big institutional clients like pension funds. Fund of Funds (FOF) used to be a big part of the business but less so today. They used to reply on the fact that due diligence was hard and access limited. It's not the case today. So sub $10m is mainly the managers own money and friends and family. Sub $100m you may some HMW and family office and possibly a FOF. Post $100m you can start to attract interest of some of the more adventurous institutional investors. After £500 you're definitely in the institutional category. Institutions don't want to invest in small managers because they need to invest in size otherwise is not worth their effort but they also don't want to be your entire assets either hence the minimums. Once Institutions start coming in in size then asset levels can really accelerate as the aren't that many funds that are very large so they have a limited choice. So what type of client to have is entirely dependant on your size. In fact it's more dependant on your size than your returns. In the early days to have to be a bit racy to generate the interest. As soon as to get bigger to need to calm things down a bit.
The comment you're replying to laid it out pretty clearly if you want to be a part of a hedge fund (as I interpret your question.) Know friends and family with money (a lot, hopefully) or, more commonly, have institutional connections. Have at least some connections and experience in finance/banking/investing (at a large scale, not small-fry stuff). Bring the two together with a lot of marketing and promises.
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).
It depends what you want to do. Portfolio manager and quant research roles are rare and highly competitive but other roles in risk, ops or compliance are more common. It's an insiders market for sure.
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'.
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.
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.
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.
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.
As a person who works in HFT, I don't really understand the supposed edge of hedge funds. The article makes it sound like the core strategy is buying some stocks and selling others. Why is this revolutionary though? Selling is just offsetting the buys and reducing overall exposure to the market, equivalent to having bought less in the first place.
Then the article mentions "buying in a bull market" and "selling in a bear market" - which obviously makes money, but is predicated on your ability to predict market moves, the possibility of which is highly questionable... And if you already know what the market is doing, then hedging only reduces your upside. It seems to me like the real strategy here is predicting market moves, and everything else is just paper shuffling.
If directional investors want to limit their downside, then invest less in the first place.
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.
One part of this story that is new to me is that he sort of invented an early version of the modern pod shop. Of course he wasn't operating it with the same risk management discipline, but still interesting.
Interesting read, but I found this a missed opportunity to link AW Jones' journalistic background to some of the journalistic elements behind running a hedge fund.
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.
If you read Matt Levine's blog he talks about this quasi-journalistic short selling model a lot -- here's a good example -- you can follow the links to find more:
> It was started in 1949 by a middle-aged journalist with a masters in sociology and little-to-no investing experience.
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 like to know what you're proposing as an alternative. There are savings, we want to take those savings and give them to businesses to invest and grow and then share in the profits. This is good for the investor and for the business and as a result for the economy in general. It's literally a positive sum game - there may be inequality in society, but in general everyone is getting richer over time.
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.
I think the average person should, in fact, do what my former manager at the hedge fund advised me to do with my own money, just put it in a low cost index fund that tracks the S&P.
> . Very few clients are actually high net worth individuals who trust the skill of the hedge fund manager.
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:)
> The vast majority of hedge fund clients are high net worth individuals, with very few pension clients for the typical hedge fund.
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.
> The vast majority of hedge fund clients are high net worth individuals, with very few pension clients for the typical hedge 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.
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:)
> Again with thousands of hedge funds and very few pension funds how could the majority of clients be pensions?
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.)
I’m pretty sure my pension has holdings in around 100 hedge funds — but it has more allocated to private equity and real estate. The endowment has more in hedge funds than the pension iiuc, but in basically the same funds. The investment office also announced last year that it is going to divest from hedge funds and re-allocate that to private credit. The chief investment officer said the hedge funds didn’t proved any hedge in 2000, 2008, or 2020.
They didn't move the goalposts. They said (originally):
> 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).
