Alfred Winslow Jones Is Doing His Best Homer Simpson Somewhere

Who? Alfred Winslow Jones (1900–1989), was a sociologist, author, and financial journalist, but more interestingly he is believed by many to be the father of the modern hedge fund industry.

hedge fund profitsJones had rules with regards to investing, but more famously, he had rules about his compensation. He followed what he believed to be the Phoenician sea captain’s compensation standard of keeping a fifth of the profits from successful voyages. In other words, Jones didn’t charge management fees and instead took 20% of any profits. This compensation model stuck for some time within the very exclusive hedge fund industry of yesteryear, but, as with most things, time morphed this into the almost unrecognizable.

1/10. 2/20. Hell, some retail products even take a 2–5% “sales fee” right off the top (like a mutual fund), thereby throwing you into the hole before they even start.—If only Jones could see the industry now.

Let me try to put this in a different perspective… you’re charged entrance after hawking you in, let you sit down at the table but not play, swipe another fee just for promising (not guaranteeing but promising) to make you money in the casino, and then if they actually do make money from their bets, well, they take Jones’ captain’s fifth.

What makes this whole model truly hard to swallow is that the average hedge fund nowadays doesn’t really “hedge” their bets, nor deliver in ANY market environment, nor even outperform an index fund. In other words, everything Jones defined as a “hedge fund,” the average modern day fund manager cannot come close to matching or delivering.

For data on this topic, click the link below and see for yourself. Preqin’s “All Hedge Fund Strategies” Index shows a gain of 1.2% since the start of the year. At this rate they’ll barely keep pace with real inflation in most countries. Oh, and if you’re a new retail investor, guess what? You’re still in that hole.

To read more on this and to see an example chart, head over to Bloomberg.

  • Hedge Fund Guy

    To be fair, all hedge funds are not created equal. But your point is well taken.