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Leveraged and Hedged

Speculative Investment Technique for Profitable Returns

In 1949, Alfred Winslow Jones wrote an article in Fortune magazine on stock market behaviour based on the interpretations of technical analysts who were focused on charts, statistics, and trends. Jones was 88 when he passed away in 1989. He was inducted into the Alpha Hedge Fund Hall of Fame in 2008. The man who was described as more academic than investor, set up a hedge fund in 1949 based on his research on technical analysis. His underlying investment principle was focused on leveraging the fund’s capital to buy financial securities on margin and hedging positions held in the fund’s portfolio.

His strategy minimised market exposure, while profiting from stock gains in the long positions and price declines in the short positions.

Jones founded one of the first modern hedge funds. His investment approach enabled the fund to return 17% gain on investment in the first year of operation. By 1963, two of his funds had gained by 31% and 38%, compared to an increase of 6% for the Dow Jones industrials.

With leveraging capital to buy financial securities, underlined by a portfolio hedging strategy and technical analysis, there are countless stories like Jones’s, and examples of fund managers that have outperformed either a ‘composite index’ of stock market-based indices, or a ‘peer group’ benchmark. Their analysis is considered slightly more useful in forecasting trends than fundamental analysis, but significantly more useful in predicting turning points in trending markets.


The Leveraged Hedge

Jones’s use of leverage meant that he could significantly increase the return that his investment provided while taking short positions that enabled him to operate on the long side with maximum aggressiveness. His strategy minimised market exposure, while profiting from stock gains in the long positions and price declines in the short positions. Where investors questioned his approach, Jones simply said he was using “speculative techniques for conservative ends.”




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