In ten-year wager, Buffett index leads hedge fund

At the beginning of 2008 Warren Buffett made a very interesting bet. He wagered $1 million (for charity) that a Vanguard index fund that tracks the S&P 500 would outperform a hedge fund of funds assembled by Protégé Partners LLC over a decade timeframe.

With six more years to run on the bet, Buffett’s horse is in the lead. Here’s the four year update.

Vanguard’s S&P 500 fund has hardly burned the house down over the last four years. By the end of February 2012, the index fund was up just 2.2% overall, including the reinvestment of dividends.

But even with those meager returns, the index leads Protégé’s fund of funds (a hedge fund that is essentially a portfolio of other hedge funds). Protégé’s entry is down 4.5 percent thus far.

Through the end of 2011, Protégé was slightly ahead, but the index has pulled ahead in the early portion of 2012. See Bloomberg report on the bet.

Pleasantly not surprised

It has always been my expectation that the buy-and-hold large cap index would outperform the professionally managed hedge fund, even though the hedge fund managers can make strategic portfolio changes at any time; utilize derivatives, currencies and commodities; time their investments based on changing economic conditions; sell short; and so on.

As I have said each year when this topic rolls around, I don’t believe the active managers can add enough performance boost to overcome the considerable fees and transaction costs inherent in their business model.

Hedge funds of funds are among the highest fee investment vehicles on the road today. On top of the 2 percent management fee and 20 percent performance fee that hedge funds typically charge, funds of funds add another layer of fees, often as high as 1.25 percent of assets and 7.5 percent of any gains, according to data from Bloomberg.

With this fee structure funds of funds are losing popularity, especially among large institutional investors seeking better performance.

Another one for the tortoise?

A potential win by the index may seem like a big upset, but is really not uncommon. Indexes often beat actively managed funds. The world’s most prominent bond fund got clobbered last year by a no-frills index fund. Here’s my post on that tortoise-beats-hare story.  I’ll have more to say on this topic next week too.

Tale of the tape

Here’s how the Buffett vs. Protégé contenders have fared since the wager launched.


Vanguard S&P 500

 index fund (%)

Protégé hedge

fund of funds (%)













Jan 1 – Feb 29, 2012







There’s no way to know what will happen over the remaining six years of the wager. And that’s why I favor the index. The hedge fund managers have to tweak and adjust their holdings based on their best guess as to what will happen in the economy and the markets. The longer I spend in the investment world, the better I understand that we just can’t know what an unknowable future will bring.

Because the Vanguard index does not rely on guessing right about the future and has a big built-in fee advantage, I’m still expecting Buffett and the index to prevail. And that’s why I believe so strongly in Osbon Capital’s index boutique approach.

Here’s what I’ve had to say about this wager in previous posts:

2008: Warren Buffett bets on an index

2011: Buffett bets on an index – third year update


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