Note: This post was written by the previous owner of this blog in 2012.
Warren Buffet made a bet, for charity, with a prominent hedge fund that they would not beat the S&P Index over the course of 10 years. Four (4) years into the bet, Warren Buffet is proving that his theory is correct.
The wager that began on Jan. 1, 2008, pits the Omaha, Nebraska, billionaire against Protégé Partners LLC, a New York fund of hedge funds co-founded by Ted Seides and Jeffrey Tarrant. Protégé built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor’s 500 Index. The winner’s charity of choice gets $1 million when the bet ends on Dec. 31, 2017.
The Vanguard fund’s low-cost Admiral shares returned 2.2 percent, with dividends reinvested, from the start of the bet through Feb. 29, as stocks rebounded from a 12-year low in March 2009. The hedge funds fell about 4.5 percent, based on Protégé’s index returns for the first three years and results since then for the Dow Jones Credit Suisse Hedge Fund Index, which has roughly tracked the group of unidentified funds when adjustments are made for extra fees.
The article goes onto say that hedge funds have underperformed because of fees. “In addition to the 2 percent management fee and 20 percent performance fee that hedge funds typically charge, the funds of funds add another layer of fees, on average 1.25 percent of assets and 7.5 percent of any gains.” That’s a lot of money skimmed off the top before it gets to the investor.
It seems that the winners in hedge funds are the managers who collect the fees and not the investors who invest the resources. So for those of you out there who think that 1 percenters may have better investment options than the 99 percent, Warren Buffett is proving you wrong so far.