A former journalist helped create the hedge-fund model

A reporting assignment became an investment strategy

In 1949, financial journalist Alfred Winslow Jones was researching investment methods for an article when he began developing a strategy of his own. Rather than rely only on stocks rising, he paired investments expected to gain value with bets against stocks he expected to fall. He then raised outside money to put the approach into practice.

The combination mattered: one side could help offset losses on the other if the broader market moved against him. That attempt to manage market risk helped establish a model later known as the hedge fund.

How the hedge worked

To short-sell a stock, an investor borrows shares and sells them, hoping to buy them back later for less and return them to the lender. If the price falls, the short can make money; if it rises, the investor may have to buy back the shares at a higher price and lose money.

Jones’s approach combined those short positions with ordinary purchases of stocks expected to rise. The purchases were called “long” positions. By holding both, a fund could aim to profit from choosing the right stocks while reducing how much its results depended on the market as a whole. The hedge was not a guarantee: poor choices on either side could still cause losses.

From a specific tactic to a broad label

The word “hedge” describes the effort to offset one investment’s risk with another. Jones’s fund also helped popularize an arrangement in which an investment manager pooled money from clients and made those kinds of decisions for them. Over time, “hedge fund” became a broad label for many types of private investment funds, not just funds using Jones’s original long-and-short approach.

The lasting twist is that a journalist’s attempt to explain investing techniques led him to build an investment vehicle around them—and gave a name to a strategy designed not merely to ride a rising market, but to prepare for a falling one.