ABSTRACT
One of the major financial innovations in the 19th century was the investment fund. The basic idea was that the potential returns on investments could be substantially increased and the risk reduced if many small investors combined to make a joint capital investment. This facilitated an investment system that was otherwise only available to large-scale investors.1 Risk diversification was guaranteed by the purchase of many different securities, while a higher return was feasible because the reduced risk meant that there was no need to restrict purchases to government bonds that were regarded as safe. Higher-yield industrial bonds and especially equities could also be included in the portfolio. The investment fund obtained its investible cash by issuing shares or certificates and usually reinvested them on a broadly diversified basis in listed securities. This diversification was achieved not only by investing in shares and bonds, but also through a portfolio mix with respect to the industries and countries invested in. By watching the market closely, the investment fund could sell securities in receptive markets and buy them when prices were falling. It could buy in large quantities, subscribe new issues and hold them until they turned in a profit. It could make arbitrage profits if, for technical reasons, securities prices differed between New York and, for example, London. In all respects the fund was in a better strategic position than the simple capital investor acting alone.2
