The History of Funds and Hedge Funds – Part 2

Screen-Shot-2014-08-22-at-10.13.24 The History of Funds and Hedge Funds - Part 2

The beginning of Mutual Funds

There happens to be some confusion between two different schools of thought, each of which has their own version of stories to tell regarding how the first mutual funds came to be born. Some historians are of the opinion that the first crude form of these investment funds was set up by King William during the year 1822 in the Netherlands. They say this is the earliest recorded incident that can be traced back to a system mimicking the modern mutual fund of today.

The second school of thought seems to have a larger following. According to this approach, the very first time something like this was established was in 1774 by Adriaan van Ketwich, a famous Dutch painter. They even go on to say that King William was inspired by Ketwich to do the same.

The fund that was established by Ketwich was called the “Eendragt Maakt Magt,” which essentially translates into “unity creates strength.” This reveals the logic and reasoning behind Ketwich taking this particular initiative: he wanted to engage the interests of even those investors who had little capital to share. The only way he thought this could be made possible was if a greater sense of confidence could be evoked within them. He was quick to realize that the only way of doing that was by decreasing the probability of risk, since such people tend to be more averse to risks when they have little else to depend on. They are also relatively inexperienced when it comes to investing their money as they would much rather save it for later use or during times of economic hardship.

Ever since this era, the idea began to receive attention and many others began to see the wisdom in it. If we take a look at the world map with respect to the spread of this idea we see that it slowly made its way from one end to the other taking root everywhere in between as well.  During the mid-1880s, the Swiss adopted it and recreated something of the sort in their country. By the 1880s, the Scottish had also joined the invest fund trend by launching similar financial vehicles.

During the same period, Britain and France also began to seriously consider the benefits of these funds; they decided to try to see for themselves what they stood to gain from indulging in this activity. At the turn of the next decade, specifically the early 1890s, the US also decided to test the waters by setting up the first fund known as The Boston Personal Property Trust in 1893. Soon after this, the whole world saw many people taking a larger part in this increasingly popular domain and many new funds were created, each of which contributed to somehow shaping the future and paving the way for greater dominance of mutual funds on the financial horizon.

One of the funds is especially worth mentioning as it had a significantly bigger role to play than others did. This influential fund was the Alexander fund in Philadelphia, which rose to the forefront in the year 1907. This was one of the initial funds that allowed people to make withdrawals on demand, and it even had biannual issues.

The next prominent fund that should be added to the list of those that changed the way funds worked is the Massachusetts investors’ trust in Boston. It was founded in 1924 and was made available to the general public four years later. This is the fund that later gave way to what we know today as the renowned and popular company called MFS investment management.

The year 1928 is noted as an important year in the history of mutual funds for yet another reason: the creation of the Wellington Fund was introduced, which completely transformed the entire concept of investment through funds. Up until this point, mutual funds mostly invested in businesses and trades. However, the Wellington fund led the way to the turning point that would change that forever. The fund did this by investing generously in bonds and stocks. This proved to be fruitful as it encouraged people to realize that several other options also existed and that sometimes thinking outside of the box is what can result in the discovery of a new formula for success. This was a critical and innovative point in the historical account of mutual funds as people witnessed before their very eyes that they need not stick to a single tried and tested strategy.

Related Posts: The History of Funds and Hedge Funds – Part 1