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Financial Happenings Blog
Monday, June 09 2008

The Fortune magazine's website, based in the US, has published an article discussing a recent wager between Warren Buffet and a fund of hedge funds manager - Protégé Partners LLC - Buffett's big bet.


The actual bet is phrased:


"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 a basis net of fees, costs and expenses."


Protégé has placed its bet on five funds of hedge funds, specifically the averaged returns that those vehicles deliver net of all fees, costs and expenses.  Buffet on the other hand has bet on the returns from Vanguard's low-cost S&P 500 index fund.


The arguments for each are nicely summarised on the Long Bets site - Bet 362 -


Buffet's argument is predictable:


"A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe 'the active investors' must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor's equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

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


In reply, Protégé agrees with Buffet's premise that "active management in a narrowly defined universe like the S & P 500 is destined to underperform market indexes.  That is a well-established fact in the context of traditional long-only investment management."  However they go on to suggest "Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay".


Not that we will be betting on the outcome, but if we were we would be putting our cash on Buffet's S&P 500 index strategy.  Buffet has both runs on the board in terms of his own investment success and is well backed up by scientific research.  Take a look at our website page outlining our research based approach if you would like to know more.


We look forward to commenting on the outcome in January 2018!!



Scott Keefer

Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
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