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Warren Buffett won his ten-year bet about index funds outperforming hedge funds

posted by Jason Kottke   Feb 19, 2018

Ten years ago, investor Warren Buffett made a bet with Ted Seides of the investment firm Protégé Partners about the relative performance of index funds and hedge funds. The bet stated:

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.

Buffett has long been critical of money managers, recommending that most people put their money into low-fee index funds instead.

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

In defense of the bet, Seides wrote:

Having the flexibility to invest both long and short, hedge funds do not set out to beat the market. Rather, they seek to generate positive returns over time regardless of the market environment. They think very differently than do traditional “relative-return” investors, whose primary goal is to beat the market, even when that only means losing less than the market when it falls. For hedge funds, success can mean outperforming the market in lean times, while underperforming in the best of times. Through a cycle, nevertheless, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. We believe such results will continue.

So Buffett invested in a Vanguard index fund and Seides picked five hedge funds of funds. On December 31, 2017, the outcome was clear: the S&P 500 had trounced the hedge funds and Buffett won his bet.