A recent Fortune magazine article provided an update on Warren Buffett’s $1 million bet with Protégé Partners, a fund of hedge funds money manager that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on the basis net of fees, costs and expenses. Buffett is trailing at the end of two years as his pick, the Vanguard S&P 500 Index Fund (Admiral Shares), is down 20.2% compared to -11.8% for Protégé’s picks.
Buffett and Protégé made their bet on Long Bets (as an aside, the Long Bets website has all sorts of fascinating bets ranging from computers continuing to fail the Turing test to where extra-terrestrial life forms will be discovered), which offers an arena for making long-term bets as a way of fostering long-term thinking. The details of the bet are available here. Both bettors contributed $320,000, which was used to purchase a strip bond that will be worth $1 million at the conclusion of the bet. The winner’s charity will receive the entire proceeds of the bet.
Buffett may be trailing but he likes the low-cost index fund’s chances:
A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.
For their part, Protégé Partners are putting faith in their hedge fund picking capabilities even though they have a very high fee hurdle to overcome. For starters Protégé charges investors a 1% annual management fee and 5% of any gains made by its hedge fund picks. The hedge funds themselves charge another 1.5% annual fee and 20% of any profits. The Vanguard S&P 500 Index fund, on the other hand, charges just 0.07%.