Warren Buffet makes $1 million Long Bet
Warren Buffett recently bet an ambitious hedge fund operator $1 million that they won't beat the returns of S&P 500 after their extremely hefty fees are accounted for. Buffett claims investors will do as well with a no-load index fund over the ten years of the bet. He has long been critical of the performance claims of hedge funds, and his bet is intended to put his money where his mouth is.LinkBuffett's million dollar bet was made on Long Bets, the accountability mechanism founded in 2002 by Stewart Brand and myself, and operated by Long Now Foundation. The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering a opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.)
In order to make a Long Bet, bettors need to lay out their reasoning. It's worth reading the two sides' very short arguments about investing because the two extremes of investment advice are contrasted in them. Buffett, as usual, is stunningly clear in his argument, which ends:
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.
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At first glance I thought that read "Jimmy Buffet makes $1 million!" Dang.
Very interesting!
Nothing against the site, but Buffett is going to win this by a country mile, unless costs are minimal. The markets are pretty efficient, and its dang hard to beat year in and year out.
I RTFA, but couldn't find mention about the fees and costs associated with Protege. What are they estimated at as a percentage?
I will be looking forward to updates! Good Luck!
No, the hedge funds will win this bet simply because in the 10 years, they will garner returns in excess of 1 million, which they would put at risk by agreeing that Buffet is right up front.
After 10 years, they'll get some negative press, but it will blow over, and clearly no investor forgoes short term returns in preference to long term.
(by returns, I mean profits for the hedge fund, not for the investors)
@PRESTERJOHN: Are you suggesting that Protege will "win" this bet (because their company gets some free PR and makes a profit from fees/etc) even if they lose the bet by underperforming the S&P 500?
yes. They get negative PR after 10 years. Who cares.
@2YANNISH: Typically Hedge funds charge "2 and 20", 2% of assets per year plus 20% of any profits. If they lose your money they don't share in the loss, but there's often a clause saying they don't get the 20% again until they get you back to even. Often hedge funds will close shop if they suffer a big loss, and open up a new one to start all over.
This gives hedge fund managers big incentive to take big risky bets and use a lot of leverage to boost returns, because they share in the upside but not the downside. So you get the occassional blowups like Long Term Capital Management or Amaranth.
I'm in total agreement with Warren Buffett here.
Oh, also notice that Mr. Buffet is only earning about a 7% return here on his $1 million (doubling in 10 years), which is less than he'd probably earn keeping it in his own stock, Berkshire Hathaway, but more than a 10-year treasury note would earn (around 4%). No doubt he views the opportunity cost as well worth it in exchange for educating at least some of the public about how bad a deal Hedge Funds are.
I'd like to see the terms of the bet (which are [private).
There are lot of loopholes that can be used to beat the S&P 500.
EG Size. US$100 million is very nimble in today's markets and would be quite easy to double. You can then glide on that with minimal growth (say in investing in T- Bills or the S&P 500 ironically) and handily beat the 7% per historical return from the S&P.
Or drop the 2/20 (2% management fee and 20% of the return on ) fee structure to goose the returns for a certain time span.
However Hedge Fund managers are notoriously hands on and flakey, and the likelyhood they will be to overreach themselves or not bust up for 10 years is slim.
- not overreach themselves.
Perhaps the bet is a form of sorely needed discipline?
#9 - Mindpowered - if $100 million is so easy to double, why doesn't everybody just go out and do it, then?
I've got $10K that's extremely nimble. I'll give you a couple bucks if you can double that for me.
Because it involves a fair amount of Risk, a very thorough understanding of what you're doing and a large dollop of discipline.
What I mean by easy, is that $100 million is a lot more liquid (easy to move from one asset class to another) than say $1 billion or more.
If you have 10K buy resources and short energy and US homebuilders. I'll tell you which ones but only for 2 & 20.