Op-Ed: What would the socialist who created the hedge fund think of the GameStop mess?

Widespread glee broke out recently when a few hedge-funders seemingly got roasted over their own fire pit by a raucous rabble of day traders. That simplistic popular narrative of GameStop will probably die hard because anti-elitist schadenfreude over hedge-funders’ misfortunes may prove too satisfying for some to relinquish.

Animosity toward hedge fund managers has grown since the 2008 financial collapse. At best, they tend to show up on front pages for enriching themselves and their exclusive clientele amid devastating economic calamities. At worst, they seem to have caused those calamities.

This would have frustrated Alfred Winslow Jones, the fascinating, little-known figure widely credited with creating the hedge fund in 1949. Jones, who for much of his life considered himself a socialist, envisioned the hedge fund as a potential market stabilizer, with commensurate benefits for everyone.

By the time he conceived of his fund, Jones had experienced enough turbulence for several lifetimes. Born in 1900, he grew up in Schenectady, N.Y., where General Electric workers staged one of the first sit-down strikes in U.S. history in 1906, then helped elect a Socialist mayor in 1911. As a boy, Jones embraced progressivism but blossomed into a full-blown Soviet sympathizer after losing a bundle in the stock market crash of 1929 and facing the onset of the Great Depression.

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Abandoning finance for foreign service, he took his first posting at the U.S. Embassy in Berlin in 1931 — in time to witness the rise of the Third Reich up close. His leftist politics endeared him to a group of German socialist dissidents. As the Weimar Republic cracked and heaved around them, they educated him in “theories of … economic exploitation as understood by Marx, and imperialism, as understood by Lenin,” according to a recently discovered manuscript of Jones’ autobiography. His marriage to (and amicable divorce from) one of these young anti-Nazi subversives wrecked his diplomatic career.

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.

David Huyssen is a visiting scholar at the John F. Kennedy Institute for North American Studies at the Free University of Berlin and teaches history at the University of York. He is writing a biography of Alfred Winslow Jones.