Handbook of Hedge Funds

2

History Revisited

The holding period of a real long-term investor should be infinite.

Analysing history is not very useful for forecasting the future, but it is crucial to understanding where we are today. By way of analogy, consider a graph showing the path of a ball in flight. The path will trace an arc that goes up and comes down. A single point on that graph – i.e. the ball at one moment in time – cannot provide a sense of the whole picture. There is little perception of where the ball is going until one sees the path it has followed so far, i.e. the flight history. In a sense, hedge funds are similar. We must know their history in order to understand where they are now and where they are headed. We therefore start this chapter by reviewing the history and development of hedge funds through economic cycles. We will then focus on hedge funds as they are today and describe their major characteristics.

2.1 THE VERY EARLY YEARS: THE 1930s

Although the creation of the first hedge fund is usually credited to Alfred Winslow Jones, researchers have recently discovered older indicators of hedge fund activity. The oldest source so far identified seems to be a book entitled Scientific Forecasting that was published in 1931 in New York by Greenberg. In it, the author, Karl Karsten, summarized most of the key principles of running a hedge fund.

Karl Karsten was a scientific researcher primarily interested in statistical research, not in finance. His first book, Charts and Graphs ...