Client Portals

Buffett’s wager on S&P 500 vs. hedge funds: Year 72 min read

Feb 18, 2015 - John Osbon ( 4 mins to read)

How time flies. It’s now been seven years since Warren Buffett wagered one million dollars that an S&P 500 index fund would outperform the picks of a prominent hedge fund manager over a ten-year period. Another year of returns is in. Who’s ahead?

Protege Partners must now hate this time of year

You may recall this bet. We report on its progress every year. Mr. Buffett’s premise in 2008 was simply that the universally available S&P 500 index would beat hedge funds over the next decade. Protégé Partners, a hedge fund firm in New York took the challenge, pitting a mix of five handpicked funds against the index. The winner’s charity of choice will receive at least one million dollars in 2018.

Big lead widens

The first year of the bet – you may recall the Great Recession – was a big mess for both sides, with the index falling farther than the hedge funds. But since then, the S&P has prevailed handily. The cumulative result at this point is the S&P index up 63 percent while the still unidentified hedge funds have managed only a 19 percent gain over seven years.

The one-year result is similar. In 2014, Buffett’s side gained 13 percent and Protégé’s less than six.

Clear lessons

We write about this wager every year as it reminds us of three very important investing principles.

First, long-term returns are so much more important to the individual investor than daily, quarterly or annual performance. Watching these two different investing approaches over a decade is a great lesson for all of us. Although the financial media is obsessed with playing short-term events for quick profits, prudent investing is a long-term exercise in patience and discipline.

Second, having more tools does not guarantee better results. Remember that hedge funds can make frequent adjustments in holdings, can sell short, can use derivatives, and can jump in or out of cash to time the latest economic and political news. The S&P 500 index has none of these options, yet is way ahead of the more agile Protégé picks. As we often see in investing, making fewer decisions, predictions and trades is often the best strategy.

Last and just as important, the far lower fee structure of the index investment is a big advantage versus the hedge funds which may be siphoning off two percent and more in performance each year to pay its managers. (Pretty good deal, getting paid handsomely to get trounced by the S&P year after year.)

Three more to go

Tune in next year for another update. A good competition with real money on the line brings out the best for investors to choose from.

John Osbon –

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