Jones’ experiences in 1930s Europe soured him on the U.S.S.R. but confirmed his opposition to the capitalist status quo. Fifteen years later, working as a journalist in New York amid capitalism’s postwar resurgence, he was still hoping to bring greater equality and equilibrium to the world. In a 1948 reminiscence for his college classmates, he confessed an ongoing desire for a society in which “levels of income, status, and prestige among us” could be “pulled together.”
From this impulse — and a boatload of research for a 1949 Fortune article about financial forecasting models — the idea for the hedge fund grew. Jones began to imagine a data-driven, technical approach to investing that could not only make money but also restrain bubble growth and cushion crashes.
The key to his approach would be an investment practice that the GameStop mess has returned to public infamy (with assistance from Elon Musk, who has labeled it a “scam”) — short sales.
This signature practice of many hedge funds — selling borrowed stock, hoping for (and sometimes prompting) its value to fall, then buying it back on the cheap to pocket the difference — can appear vicious, if not immoral, to laypeople. In what most Wall Street professionals regard as an ordinary market activity, outsiders see a kind of financial sadism, profiting off pain and misery.
But to Jones, it was an “irrationally frightening” technical device that just offered a hedge against unexpected downturns — hence his describing his firm as a “hedged fund.” Buying or selling stock always entails risk. Jones believed that if you leveraged short sales in long bets with enough skill and restraint, you could reduce that risk.
Such hedged investing, he imagined, could serve risk-averse investors, as well as the public good. As he knew from personal experience, the financial effects of bubble bursts often devastated not just investors but also the general public. Judicious short selling could theoretically prevent bubbles from forming by deflating overvalued stocks, then diminish the damage of any incipient crashes by buying back into markets as they fell.
“Gentle, orderly” markets would ensue, he postulated, and everyone would win.
The theory, as we know, has played out rather differently in practice. Few hedge-funders today get famous for risk aversion, much less restraint. Their failures can endanger systemic stability, and their success sometimes appears to thrive on economic ruin. Meanwhile, the distance between the rich and the rest keeps growing.
Jones made a lot of money running his fund and popularized his investment method, but it didn’t moderate capitalism in the way he hoped. His life and legacy offer a useful lesson to anyone indulging in fantasies that Robinhood or Reddit point the way to a fairer world: Tinkering with market techniques is unlikely to alter capitalist hierarchies.