Alfred Winslow Jones, were he alive today, might not recognize the industry he invented in 1949, but as A.W. Jones & Co. — the original hedge fund firm — celebrates its 60th anniversary this year, it is clear that it has stood the test of time. It is now a fund of funds with just under $250 million in assets, and it remains a family business, run by Jones’s son-in-law, Robert Burch III, 74, and grandson, Robert Burch IV, 34, out of offices at Rockefeller Center in New York. There the younger Burch spoke recently with Alpha Contributing Writer Jan Alexander.
Alpha: Your grandfather inspired many imitators. Do you think he saw the industry getting this big?
Burch: He wasn’t particularly optimistic about the future of hedge funds, so he’d be surprised at what’s happened. But he knew he had something important in the statistical framework he created for measuring risk-adjusted returns versus market risk.
Have institutional investors driven hedge funds to become too reliant on mathematical models and leverage?
I don’t know if institutional investors were the cause, but some institutions have had a bias toward low-volatility funds that can produce steady returns. As we’ve seen in the past two years, those strategies work well in a low-volatility environment where leverage is cheap and plentiful. But they don’t work particularly well in an unusual situation like a subprime meltdown or a global synchronized recession. Also, the more funds that are out there pursuing the goal of never having a down month, the harder it is to achieve that goal.
Would you say that hedge funds have been unfairly maligned?
Truly “hedged” funds are stabilizing forces because they buy stocks that are undervalued and sell stocks that are overvalued, which should dampen market swings and reduce the chance of bubbles. You could argue that if we’d had more hedge funds shorting subprime mortgage lenders, and doing so in a vocal manner, perhaps there would have been more regulatory inquiries made about that group and more questions about their lending practices.
Is greater regulation inevitable?
I can see the hedge fund world evolving into two different categories: small ones versus the funds that have assets in the billions of dollars, some so large they look more like investment banks. When they get that big, there is the chance that they pose systemic risk. But realistically, no regulatory agency can monitor thousands of small firms. Since the Securities and Exchange Commission would like to know how many hedge funds there are, maybe we could have a system in which the small funds have to register but only the large funds are audited.
