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Buffett Wins 10-Year Hedge Fund Bet

By David Andrew

David Andrew

In December 2007 the Oracle of Omaha, Warren Buffett, made a $1 million bet that an S&P 500 index fund would beat 10 hedge funds, net of fees, over 10 years.

At the time there wasn’t an immediate rush of hedge fund managers taking up the offer until Ted Seides of Protégé Partners stepped forward to take the bait.  A confident Mr Seides was quoted as saying, “there’s a reason sophisticated groups have been investing in hedge funds.”1

For his part Warren Buffet conceded that there are plenty of very clever people running hedge funds, it’s just that their skill in managing the money can’t overcome the high fees these funds charge.

Now ten years on, Mr Seides has conceded the bet as a lost cause, as the low-cost S&P 500 Index strategy returned $854,000, while the hedge fund investment returned $220,000.

From time to time, I am asked to comment on the different forms of investment and give an opinion.  Hedge funds are often rolled out to ‘sophisticated’ investors and Family offices, promising a special skill or insight that provides the manager the opportunity to deliver high returns.  In my experience, these returns rarely eventuate.  Hedge funds are certainly profitable for the people who run them, just not for the end investor.

The low-cost option of an index fund is a great starting point, they’re simple, and easy to access and in the past twelve months there has been an avalanche of money moving into passive funds.

An even better outcome for investors is the evidence based or multi-factor approach.  This approach harnesses the body of academic research that points towards the factors more likely to provide investors with a higher investment return. The Science of Investing booklet is available as a free download and will provide a great starting point to gain an understanding of evidence-based investing.

David Andrew is Founder and CEO of Capital Partners Private Wealth.  He is a financial planner in Perth, Western Australia, working in the areas of family wealth, business succession and estate planning.


4,587 total views, 3 views today

4,588 total views, 4 views today

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