Unlike most other great investors, with the possible exception of Georges Doriot, Jones didn’t become involved in investment management until he was nearly 50. After graduating from Harvard in 1923, Jones changed career several times. He worked as a purser on a tramp steamer, had a spell as a diplomat, and then became a sociology lecturer, before going on to write for various publications, including Fortune magazine.
Writing an article on technical analysis sparked interest in Wall Street. In 1949, he founded A. W. Jones and Company, one of the first “Hedged Funds”. He ran it for more than 30 years, before handing over control in 1984.
What was his strategy?
Jones’s idea was to “hedge” long positions with short ones. In theory, this meant his returns would not be affected by the overall market direction, but rather his ability to pick winners and losers. In reality, the fund was not always fully hedged.
Indeed, in the early 1970s it had a leveraged long position (in other words, it was aggressively betting on a rising market, and so it ran into trouble when the opposite happened). He outsourced a lot of his stockpicking to a team of analysts who were selected by getting them first to run paper portfolios.
Did this work?
Jones’s fund made money in 31 of the 34 years that he ran it, compared with nine years for the S&P 500 over the same period. Despite charging relatively high fees, the fund still returned more than 20% a year for an investor during its first two decades of operation. The fund still exists as a “fund of funds”, with $390m in assets under management. The hedge-fund model has also spread rapidly, with an estimated $2.7trn under management today, according to BarclayHedge.
What lessons are there for investors?
Studies suggest that the hedge-fund industry has become oversaturated, driving down returns – since 2009 the HFRI Hedge Fund index has returned just 50%, against around 200% for the S&P 500. As with any other area of active management, managers like Jones are the exception rather than the rule. However, there are a couple of tips from Jones that private investors can use.
Firstly, running a “paper-trading” account is a good way of trying out a strategy to see whether it works (and if you are comfortable with it), before risking real money. Secondly, Jones’s problems with excessive leverage in the early 1970s show the dangers of taking big bets with borrowed money – regardless of how confident and capable you are.