Warren Buffett On Track To Prove Hedge Funds Can’t Beat Market

Warren Buffett On Track To Prove Hedge Funds Can’t Beat Market
By USA White House [Public domain], via Wikimedia Commons

Six years into a decade-long wager, Warren Buffett’s bet on the S&P 500 is well ahead of the basket of hedge funds selected selected by his counterpart. Back in 2008, Buffett said he was certain that “experts” with trading strategies don’t do better than the stock market as a whole over time, and he put his money where his mouth is.

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Warren Buffett put up $340,000 back in early 2008, as did New York-based hedge fund Protege Partners, who selected a collection of five hedge funds of funds to compete with Buffett’s choice of S&P 500 tracking funds. The initial $680,000 stake has grown to over $1.3 million over the last six years, and the winner will donate the proceeds to charity.

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Warren Buffett S&P fund way ahead of hedge fund basket after six years

Morningstar reported earlier this year that the hedge fund approach was up 12.5% after fees, while Warren Buffett’s S&P index fund had soared by 43.8% over the six years. As Warren Buffett had anticipated, much of the difference in returns between the two relates to fees. Buffett chose an index fund that only charges 0.05% as an expense ratio, while most hedge funds charge 2% or more plus a rapacious 20% of profits.

Example of how fees impact returns

For example, a $100,000 retirement account using the index fund approach would only cost $50 a year to maintain, while a hedge strategy using would cost $2,000 and a solid 20% any upside taken out quarterly.

If the hedge fund returned 10% in a year, the manager would take $4,000. So instead of $110,000, the portfolio would be at $106,000. If the fund returned negative 2%, the hedge fund would still take its 2% fee ($1,960), leaving just $96,040 in the account

If the index fund returns 10% in a year, it will still only cost you $50, so your account would stand at $109,950. If the fund returned negative 2%, you would have $97,950 in the account.

What’s at stake

The prize at stake in the wager is Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) stock worth $1.3 million as of the end of 2013. The money will go to a charity selected by the winner. Warren Buffett chose Girls Inc. of Omaha while Protégé chose U.K.-based Absolute Returns for Kids.

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  1. It’s now seven years into this “bet,” not six. January 2008 through December 2014. It seems that everyone who’s posting something about the Buffett – Protégé wager is somewhat calendar challenged.

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