“Hedging constitutes the most important of the unique features of our investment method in that we make use of short sales for the control of stock market risk and for actual capital appreciation of our fund in a declining stock market. Hedging, that is, the taking of both long and short positions, makes our fund more stable and conservative than the ordinary forms of common stock investment; and the borrowing of additional money, protected by hedging, permits the most efficient use of our capital, without additional market risk. . . . In this early emphasis on hedging, we risk obscuring our chief aim, which is long-term capital appreciation through the buying and holding of good common stocks.
There are many illusions about short-selling. One is that the practice is immoral or antisocial. Actually, the successful short-seller is performing a useful market function in that he arrests an unjustified rise in a stock by selling it and then later cushions its fall by buying it back, thus moderating its fluctuations. Another illusion is that short-selling is somehow more dangerous than buying a stock for a rise in price. A stock can theoretically go up to infinity and down only to zero . . . and in both cases there is no danger that cannot be provided for by adequate diversification.”
— Alfred Winslow Jones, “A Basic Report to the Partners,” May 31, 1961
Robert Burch III , president of A.W. Jones & Co.: “The first thing Alfred would say about hedge fund managers today is that they are not hedged. The word is being abominated. Anybody leveraged 30 to one is not hedged — they’re just using the word to get the 20 percent performance fee. It’s false advertising. That’s the first thing he’d say. Then he’d go to his socialistic bent and ask, ‘What are they doing with all that money?’ He’d be pleased that foundations and endowments are up to their elbows in hedge funds.
He had two powerful ideas. One was that you didn’t need the traditional allocation of bonds and cash and all that — you can go 99 percent stocks, you’ll get a bigger return. Two was that you stay in there, you hang in there because you’re hedged. Those were his two things: always being in the market and having a big percentage of assets in stock.
Alfred always said just pick the best guys, but he wanted talent to prove itself. He’d give them a paper portfolio, see how they did and in the process get good ideas himself. If you wanted to work for Alfred, he’d say, ‘Fine, do a million-dollar portfolio and let’s see how you do — and make sure you’ve got plenty on the short side.’ Because the ability to short was where you separated the wheat from the chaff. The years 1949 to 1970 were huge for Alfred. The Dow was 160 in the summer of ’49! It rose to over 1,000 by 1970, and he was participating in it the whole time.”
— Interview by Karl Cates
Hedge Fund Pioneer was sociologist, journalist, diplomat, spy?