Year 5: Buffett leads in wager against hedge funds

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Five years ago Warren Buffett made a big bet, not to enrich himself, but to prove a point. He wagered that an unmanaged S&P 500 index fund would outperform hedge funds handpicked by the Wall Street firm Protége Partners. We’re now at the halfway point in the 10-year bet and Buffett is in the lead.

The score at halftime: Buffett +8.69 percent; Protégé +0.13 percent.

One million dollars (at least) will go to the winner’s charity of choice when the wager concludes at the end of 2017.

Long-term advantage

We’ve had our eye on this bet from day one, as we strongly believe that over the long term, like this bet’s 10-year term, index funds have the advantage over hedge funds and other high expense investments. Even though hedge fund managers can make strategic plays with market timing, derivatives, currencies, short sales, and other tools not available to the index, they must not only guess right about the movement of security prices, but also overcome high management fees.

So far Protégé has come up short.

We’re not surprised that Buffett’s leading, but the timing of the bet did put things in question early on. In the first year, 2008, the index lost 37 percent, far worse than the hedge funds’ 24 percent drop.  Both have rebounded since then, with the index pulling into the lead in March of 2012 and building on the lead through the year.

The index was up 16 percent in 2012, including the reinvestment of dividends. The hedge funds (Protégé picked a basket of five funds for its side of the bet) gained less than 6.5 percent in the same glowing market environment. See more details in this Fortune article.

Fees for what?

The obvious question is how can hedge funds justify their fees, typically at least 2 percent annually, when they can’t even keep up with the most widely owned index?

Of course it’s only halftime. We’ll stay tuned and keep you posted.


Here are previous Osbon Capital posts on this interesting wager:

2012: In ten-year wager, Buffett index leads hedge fund

2011: Buffett bets on an index – third year update

2008: Warren Buffett bets on an index


For our most popular posts, click here.

This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Performance is not indicative of any specific investment or future results. An investment cannot be made directly in an index. Securities mentioned may or may not be held in client accounts.  

Returns are through Dec 31, 2012.


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