Benjamin Graham (right), and his partner Jerry Newman, in 1959.
Source: Collection of the Museum of American Finance.
Benjamin Graham (right), and his partner Jerry Newman, in 1959. Source: Collection of the Museum of American Finance.

The legendary economist and investor Benjamin Graham is widely known as the father of value investing. He may also be the father of the hedge-fund industry.

While most historians and industry professionals credit Alfred Winslow Jones with launching the first hedge fund in 1949, some people, including Graham’s protege, Warren Buffett, disagree.

“Ben Graham managed a hedge fund in the mid-1920s,” Buffett wrote in a letter to the Museum of American Finance. “It involved a partnership structure, a percentage-of-profits compensation arrangement for Ben as a general partner, a number of limited partners and a variety of long and short positions.”

Jones’s company, A.W. Jones & Co., is probably credited as being the first hedge fund because it was the first to be labeled a “hedge fund,” a term that appeared in an April 1966 article by Carol Loomis in Fortune magazine titled “The Jones Nobody Keeps Up With.”

It was an in-depth profile of Jones, a sociologist and former Fortune writer whose research for a story on technical approaches to investing in the stock market prompted him to leave journalism for finance.

A New Strategy

Jones’s “hedge” concept put him in a position to profit on both rising and falling stocks. He used strategic short positions to protect himself and his investors in case he misjudged the general market trend. This was different from most investment strategies at the time, which tended to protect a portion of capital by maintaining cash reserves or bonds.

Loomis’s article noted that Jones’s funds had outperformed the top mutual fund over the previous five years by 44 percent, and had made a 670 percent return over 10 years. The story catapulted Jones to legendary status in the investing world.

Although Jones’s approach was undeniably effective, particularly during that period, his hedge method may not have been unique.

Buffett asserts that, decades before Jones, Graham and his business partner, Jerry Newman, were operating two companies with standard hedge-fund characteristics. And Buffett should know, as he worked for both.

“When I formed my own partnership in 1956, I was probably influenced in the structure I established by my knowledge of the Newman and Graham partnership,” Buffett wrote.

The details of that partnership are enumerated in the Graham-Newman Collection, which Jerry Newman’s family donated to the Museum of American Finance in 2007. Among the numerous corporate documents, letters, photographs, books and press clippings are the details of a partnership that was groundbreaking and continually evolving, with revisions and amendments to their partnership agreement appearing every few years.

The collection also hints at the interpersonal relationship between Graham and Newman, with dozens of letters on topics ranging from investment ideas to philanthropic activities to family updates. It includes personal mementos such as a sterling silver medal Graham presented to Newman on the anniversary of their partnership. It was inscribed, “To Jerry, a medal for tolerating me for the past 25 years. Ben 1927-1952.”

Although analysis of the Graham-Newman partnership would lead most to agree it displayed hedge-fund characteristics -- from its strategic long and short investment positions to its compensation structure -- even those who don’t credit Jones with running the first hedge fund debate whether that distinction should go to Graham.

Aristotle, Investment Guru

In a 2007 article on CFO.com, Alan Rappeport traces the industry’s roots as far back as Ancient Greece.

“Many think of hedge funds as the current flavor of the month in investing and capital markets,” Rappeport wrote. “But scholars trace the funds’ roots back to a tale told by Aristotle in which the philosopher Thales bet on a bumper olive crop. Thales cannily wrangled with the owners of olive presses until he gained the exclusive rights to use the equipment in the upcoming harvest. Like today’s hedge-fund advisers, he used a contrarian trade to profit mightily.”

Buffett might even agree with this assessment.

“I make no claim that Ben’s mid-1920s partnership was the first” hedge fund, he wrote. “It’s just the first that I know of.”

(Kristin Aguilera is the deputy director of the Museum of American Finance and the editor of Financial History magazine. The opinions expressed are her own.)

Read more Echoes columns online.

To contact the writer of this post: Kristin Aguilera at kaguilera@moaf.org.

To contact the editor responsible for this post: Timothy Lavin at tlavin1@bloomberg.net.