Buffett vs. the hedge funds

A a Berkshire A-Class stockholder, it’s not even a contest. I have lost plenty of money with hedge funds, but I’ve never lost any money with Mr. Buffet.

I prefer investing in ETF’s so perhaps I’m biased but I think Buffett will win hands down.

Aside from crippling fees, hedge funds constantly make bets on the market. Recently, Protege’s bets have paid out quite well, but there’s no guarantee that future bets will also have the same results.

Does any one think that Protege would have made the bet if they lost rather than gained on their recent investments (ie. subprime market)??

In my opinion, if Protege had not experienced the recent success that it has, they probably wouldn’t have had the balls to make the bet.

I hate when mutual funds or hedge funds get confident about their ability to beat the market after a measly 5 years.

Annualized volatility of the S&P 500 since Jan-1990 is 13.77%. The same statistic for the HFRI Fund of Funds composite index is 5.54%. For anyone who things investing in the long-only index such as the S&P is “safe” – do your homework first. Over the same period, S&P outperforms the Fund of Funds index by about 1% per year – exactly because it’s MORE risky, not less. Just think about the 45% drawdown that the S&P had between 2000 and 2003, if you have any trouble visualizing what more risk means. While this might be acceptable for a young investor who’s looking to cash out 40 years from now, it’s NOT acceptable for an insurance company, an endowment, or a pension plan, which needs to pay out a certain portion of the portfolio every year in claims or benefits.

Having fewer constraints in investing by being able to go both long and short, investing in equities and credit markets, using options, having a broader geographical mandate are all positives, and Mr. Buffet of all people knows that diversification is a benefit to portfolio construction. Anybody who’s taken an itro to economics class will tell you that.

Although a great publicity stunt, this type of bet is most unfair to individual or institutional investors, since it promotes a negative stigma of alternative investments without providing much substance to the argument. Do your homework, think about your long term goals, focus on diversification and risk-adjusted returns, and do what’s right for you – not for Mr. Buffet.

I think Buffet. Index funds, with low management fees / low turnover costs rank high over the long-term. On the other hand, active investment managers are more expensive than the passive managers and there is little to show that they consistently outperform the index.

I think Buffett will win, but I have a lot of money in index funds. Hedge funds tend to be highly volatile, though, so a few good years and they could win. But who would gamble their life savings on “casino” investments.

As someone else pointed out, Buffett is also effectively betting on the US economy, also low volatility and a good performer over the longer term.

I will wager 1 cent Buffet will win. If Protege wins, most of us will need to hang on to what “Little” we have left.

The fees and percentage of profits going to management raise the bar too high; The Oracle of Omaha will win the bet – especially in a market that will treat risk taking unkindly.

Buffett will win. Not even the savviest group of investors can pick and choose stocks to consistently beat the market by enough to offset fees and commissions over any significant period of time. On the off-chance Protege wins, it will be only because hedge funds have a banner decade coming and the S & P has a lousy decade ahead. Ten years isn’t really that long for investing; retirement investing should start with 40 years ahead of you. Over a truly long period of time like that, the S&P will destroy any hedge fund returns.

I see two ways that the hedge fund team can win:

1)If the hedge funds can invest much heavier in international markets, they can benefit from higher growth potential markets.

2) As noted in the article, hedge funds can outperform in sharp down markets. If we have another such correction during the last year of the contest, the hedge fund team could have a big advantage.

“I think Mr. Buffett made one small mistake – should have bet on a total stock market fund – not an S&P fund. Needs the kick and diversification of small caps and mid caps.”

I suppose his point is — even a ’safe’ fund like s&p can beat the shorts off the charlatans and con-men charging you fees up the wazoo.

If he wanted to make the bet difficult, he’d just offer up BRK.a as the benchmark and challenge any and all comers to beat it.

Warren is not infallable. Lampert for example got the better of him on a couple times. Then there’s Dairy Queen. Even so, it was another smart bet by the Oracle and a recommendation every investor should contemplate for a while. I actually prefer the 500 to a broad market bet. Co’s with foreign earnings will rule, i.e. outperform, for the forseeable future, or at least until an appreciable rise in the $.

Buffett will win hands down!! couple of quick reasons – fees / volatility and taking the right bets will work against hedge funds. over the next 3 years itself, the S&P will perform stronger than the hedge funds given the 30 to 40% correction that has happened in the last few months. These have been driven more by sentiment than on actual fundamentals. Hedge funds model is more sentiment prone and riskier than S&P as a whole.

How on earth could anyone (including Protege) bet against Warren Buffett? No one on the planet knows more about investing, including the hedge fund clowns, so for anyone to think that he would make a bet he thought he could lose is nuts. I believe in miracles, but there are three certainties in life: Death, taxed, and WB making money.

People bet in hedge fund of funds for the benefits of diversification. It is not a market enhanced return they are looking for, but some loss mitigation. Also, people do not want to have place their entire risk budget on US equities. Therefore, with different investment objectives, the horse race mentality is silly. Most likely, the HFOF will have a slightly lower annualized return, but with much lower volatility, over a decade and given the compounding effect, the HFOF should be pretty close to the S&P. I’ll take Protege, by a whisker

6 year is a full market turn, and somewhere there the hedggies will stumble, and still be raking in too much principal and interest…history give Buffet the edge. If it were more hedge funds, Buffet would surely win, but there is a small chance one of them could get lucky…witness loss by Big Brown.

If the bet was a short term bet, there would be no question: Buffett hands down. But with the “funny” world we are living in today and the bet for 10 years — well, it just might be that the hedge fund boys could win. Hard to bet against Buffett though.

Buffett. End of story.

What amuses me the most about this is that up until now Buffett had no takers for his bet. You’d think that every hedge fund manager would want to jump on it, just to show their clients that all that money they are paying in fees are justifiable.
My money is on Buffett.

The odds are squarely in favor of Buffett, but maybe Protege will get lucky.

A $320,000 bet by Buffett represents less than 1/100,000 of his net worth, or the equivalent of a $100 bet by a person with a $10 million net worth, this does not seem like such a big bet in that context.

This is a classic arguement over whether anyone can truly be keener than market forces. The unfortunate part of this bet is that the advantage goes to Mr. Buffett because a large portfolio of these hedge funds will have some effect on the market, as many of these funds tend to run together on a lot of positions. I do think that funds do have the ability to have a better than average return if a diverse portfolio of them is managed enough to keep the returns in check. It is obvious, though, given the current state of our economy, that these pricy funds tend to overindulge in the next hot trend and usually only make gobs of money for the people that manage them.

On a side note, I’d probably invest in both — index based funds and a swatch of hedge funds and mutuals. Even if I don’t outperform the market by much, the degree of risk reduction is very attractive.

I think Mr. Buffett made one small mistake – should have bet on a total stock market fund – not an S&P fund. Needs the kick and diversification of small caps and mid caps.

We all win! Both Buffett and Protege benefit from the free publicity now and during the 10 years of the bet. They each benefit with their clients from having made such a committment in belief of their own method of investing. The charities (and Buffett’s daughter) benefit from the publicity and association with Buffett. All investors will benefit from any enthusiasm for investing created since that will have a positive effect on the markets and returns. Hedge fund investors will benefit from reduced fees due to the pressure the exposure places on hedge fund fees. Index funds and mutual funds will benefit from Buffett’s stated belief in their ability to outperform in a 10 year period (not instantly but hardly forever either). Buffett can’t lose because 10 years from now it won’t matter because he will be gone or retired and if he is out of the spotlight no one will even notice the result of the bet, he’s only betting pocket change anyway, he’s helping his daughter and her charity and his personal investments and those of his clients are sure to benefit from the market activity and earn him far more than his cost. Protege can’t lose because now we all know them (and that Buffett takes them seriously) and they will make their fortunes during the next 10 years and not need to win.

This is not even a gamble, Hedge funds make money for their employees, not their investors.

If the hedge funds have to pay their usual fees of 2-20 than Buffett is an easy favorite. In the past mutual funds could not even make up their fee of around 1.2%. If the hedge funds rake off 2% of the assets each year and 20% of their gains, the hedge fund managers will have to be very good just to earn back their fees.

How can you bet against Buffett? I’d bet my life savings on it…