Starting Hedge Fund

Starting Hedge Fund is the one floated by the renowned Sociologist, Mr. A.W. Jones. After the completion of the World War two, in the year 1949, Mr. Jones was studying the technical and fundamental factors associated with the movement of prices in the stock market. At this time around, he came out with a fund which is depicted as the Starting Hedge Fund.

The investment strategies that have been used in this Starting Hedge Fund by Jones was two pronged. One of the two approaches involve Short selling technique and the other is the leveraged style of investment.

In case of short selling, the investor sells the security before buying the same in expectation that the price of the concerned security would come down and this would give him the chance of squaring off the transaction by buying it cheap.

In case of Leverage, the investor takes either a long or short position of an amount which is much higher than the down payment amount. The investors taking such positions often borrow funds and invest. That is why the individuals or the institutions which take leveraged positions are often seen with a high debt to equity ratio. These two instruments were utilized by Mr A.W. Jones in a unique way so that the risk associated with them decreases. If the short selling along with the leveraged positions are used simultaneously by an investor then they are considered to be exposed to high risk. But Jones was the first person who first showed that these instruments can be used in an efficient manner for hedging purposes in case of bearish market.

The strategy adopted by Jones in the Starting Hedge Fund was that of a technique known as hedging technique. First of all he constructed a portfolio having both under valued and over valued stocks. The stocks of the under valued nature are expected to perform good in the future and the pries are expected to rise. But the over valued stocks are expected to do the very opposite of the under valued ones. Hence he took two opposite positions in selecting stocks in his portfolio. He took leveraged long position for the under valued stocks and leveraged short positions for the overvalued ones. In any directional movement of the market, the investor is not going to lose from it because the positions are just opposite to one another. Thus, Jones constructed a Hedge Fund which decrease the risks. It also essentially means that the returns are not that high because of hedging. Thus Starting Hedge Fund was of hedging nature and was the main reason for the name given to such funds and that is Hedge Funds.