Buffett's $1,000,000 Bet -- S&P 500 will beat hedge funds after fees

[Jay_Gatsby]

Warren Buffett recently bet an ambitious hedge fund operator $1 million that they won't beat the returns of S&P 500 after their extremely hefty fees are accounted for. Buffett claims investors will do as well with a no-load index fund over the ten years of the bet. He has long been critical of the performance claims of hedge funds, and his bet is intended to put his money where his mouth is.

Conceptual Trends and Current Topics

 

[mn54]

Any bets on whether he'll still be around in 10 years? All it would take is one great year for the hedge fund to win. One of the owners of the MN. Wild hockey team is a hedge fund mgr. He shorted the sub-prime mkt. and made 1.8 billion. It would be tough for the S&P to beat that.

 

[cute fuzzy bunny]

A million bucks for Warren isnt much of a bet...

I'm sure one or two hedge funds knock the skin off the ball every year. Just not sure its going to do it two years out of ten, or that I can figure out which one is going to be the lucky winner this year...

 

[retire@40]

I wonder more if hedge funds will be around in 10 years.

They are the classic case where the professionals running the investment make millions and sometimes billions of dollars only to find out later that the operation is a semi-scam.

Over the long-term it is difficult to keep a "durable competitive advantage" in anything.

There have been many cases where a blockbuster performance is followed by a bone-crushing crash, and I think this hedge fund phenomena will be the next big fad to get clobbered in the next 10 years.

 

[mickeyd]

Is wagering now legal in Omaha?

Warren Buffett recently bet

 

[Texas Proud]

Any bets on whether he'll still be around in 10 years? All it would take is one great year for the hedge fund to win. One of the owners of the MN. Wild hockey team is a hedge fund mgr. He shorted the sub-prime mkt. and made 1.8 billion. It would be tough for the S&P to beat that.

Yea.... but he did that on his own... not through a fund who takes 30% to 50% of the profits and none of the losses.... (I made this up for anyone about to take my head off )

 

[Leonidas]

A million bucks for Warren isnt much of a bet...

And it's in future dollars, and he only put up half of the amount necessary to reach a mill in ten year ($360K), the hedge fund put up the other half.

 

[Nords]

Is wagering now legal in Omaha?

The details of the article say it's for charity.

I think the hedgies made a brilliant publicity ploy here, and they don't have to care who wins since they're going to pay for it out of the [-]shareholder expenses[/-] marketing budget. Either way they'll be swamped with [-]dumb money[/-] eager accredited investors clamoring to get their part of the alpha.

 

[Jay_Gatsby]

Buffett's bet is essentially the same argument we've had for years about index funds versus actively-managed funds. It's actually a better bet than that, since hedge funds do take on more risk and take more of the profits.

 

[ziggy29]

I suspect Buffett might think the hedgies have too much money in overvalued and bubblicious holdings (oil and other commodity futures, anyone?), and may suspect they're in for a rough patch when the bubble pops and a weak economy continues to erode demand for commodities.

 

[free4now]

What surprised me was that Buffet said he was only 60% sure he would win the bet. That is a fairly strong vote of confidence in that particular hedge fund, even though I'm sure that was not his intention.

 

[Abreutime]

What surprised me was that Buffet said he was only 60% sure he would win the bet. That is a fairly strong vote of confidence in that particular hedge fund, even though I'm sure that was not his intention.

Well, hedge funds have an advantage in down markets (they can short, or simply stay in cash), and Buffett is not overly optimistic about the medium term performance of any economy. Also, he has absolutely nothing to gain from predicting a higher success rate.

In any case, this bet will at least bring hedge fund fees to the forefront of the debate. The more investors are aware of fees, the better they'll be.

 

[AzDreamer]

Most of you are missing the point of hedge funds. They are supposed to be set up to buffer the holders from wild swings up and down. They sacrifice some return for the insurance they won't be killed in a really bad year.

Just because some so-called hedge funds made insane bets on leveraged securities doesn't mean they all operate that way.

 

[free4now]

The name "hedge fund" seems to be more of a historical vestige than an actual description of how most of these "hedge funds" invest today. Most seem to use leverage to increase their exposure to the market (whether long or short) rather than to limit exposure. The hedge funds will claim that their special abilities to time the market will keep them ahead. It works well until it stops working.