Buffett Says He's Winning Hedge Fund Bet
The hottest news in Berkshire Hathaway’s 2016 annual report—posted just
minutes ago—is that CEO Warren Buffett devotes almost five pages of his
avidly-awaited shareholder letter to a scathing denunciation of hedge funds
for charging high fees while delivering sub-par, if not miserable, results
to their investors. There’s a bottom line, he says: “When trillions of
dollars are managed by Wall Streeters charging high fees, it will usually be
the managers who reap outsized profits, not the clients.”
He meanwhile stingingly documents his case by disclosing the standings,
after nine years, of a 10-year performance bet between his own investment
pick—a low-cost S&P 500 index fund administered by Vanguard—and the pick
of Protégé Partners, an asset manager who elected to bank on the average
performance of five funds of hedge funds that it chose for the competition.
The stakes, you might say, were large: $500,000 for each party, the total of
which explains why this wager is sometimes called “The Million-Dollar Bet.”
And the envelope, please? After nine years, the index fund has registered a
compounded annual increase of 7.1%. And the average for the five funds (
whose names have never been made public) is 2.2%. In total gains, the index
fund is up 85.4%. The average gain of the five funds is 22%. (The best
performer of the five is up 62.8%. The worst performer—over nine years,
remember—has been mind-bendingly bad: up only 2.9%.)
To dig into this subject a little, let’s say that you already knew—from
Fortune’s annual articles disclosing the bet’s results, in fact—that
Buffett was so far ahead he couldn’t lose.
