The renowned king of investors, billionaire Warren Buffett, has cashed in a $1 million bet he made with hedge fund managers a decade ago.
Buffett, who has long argued that hedge funds are too expensive and fail to deliver expansive promises to investors, struck the bet in 2007.
Then, he predicted a basket of hedge funds would fail to outperform the Standard & Poor’s 500 index over a decade.
Hedge fund managers Protégé Partners took on the bet.
Over the decade, the S&P 500 averaged a 7.1% annual gain, but the funds picked by Protégé Partners only returned an average of 2.2%.
Buffett has donated his winnings to charity.
Rich suckered in
He argues that the rich are ‘suckered in’ by Wall Street fund managers and waste $10 billion a year in fees.
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he said. “Both large and small investors should stick with low-cost index funds.”
Buffett, 86, reckons almost two-thirds of hedge fund gains are soaked up as fees by the fund managers.
“That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly – and with virtually no cost – achieved on their own,” he said.
Tracker fund fan
Buffett is a fan of low-cost tracker funds, which he explains do the same job as expensive fund managers, but for a much lower price.
“My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory,” said Ted Seides, a founder of Protégé Partners.
“The S&P 500 looks overpriced and has a reasonable chance of disappointing passive investors.
“He is correct that hedge-fund fees are high, and his reasoning is convincing. Fees matter in investing, no doubt about it.
“Hedge funds mitigate risk in bear markets, while seeking to participate in some of a bull market. Investing in hedge funds is a bet against continuing bull markets; investing in the S&P 500 is a bet on a continuing bull market.”
