A Hedge Fund Group Accepted Warren Buffett’s Index Fund Challenge. It Did Not Go Well for Them.
August 31st, 2017 | Posted in Investing
In 2008, Warren Buffett bet the hedge fund industry they could not beat a typical S&P index fund over a decade. One group was brave enough to take on that challenge.
After nine years, the results are becoming clear, according to an article on cnbc.com. It’s officially a rout:
- The portfolio of hedge fund is up 22% on average. Warren Buffett’s Vanguard Admiral Shares S&P 500 Index Fund pick was 85.4% for same period.
- Three of the five hedge funds have average annualized returns of less than 1 percent.
Buffett has long believed that high costs stemming from hedge funds’ active stock-picking and high fees would prevent them from matching the return of a market-based index fund. And he was willing to back up his assertion with real money. So nearly 10 years ago, he issued a challenge — a $1 million bet that no one could put together a portfolio of hedge funds that would outperform an S&P 500 Index fund over a 10-year period. Proceeds would go the charities of the participants’ choice.
One company took him up on it. Protégé Partners LLC selected five hedge funds (which have not been disclosed publicly), and Buffett selected the Vanguard Admiral Shares S&P 500 Index Fund.
The Results
2008–2016 Cumulative Returns of Funds in the Buffett Challenge
- Fund A: 8.7%
- Fund B: 28.3%
- Fund C: 62.8%
- Fund D: 2.9%
- Fund E: 7.5%
- Hedge Fund Average: 22.0%
- Index Fund: 85.4%
The Real Winners: Buffett’s Charity and Savvy Investors
Buffett comes out looking good, of course. But there are others, in addition to Buffett’s charity, that stand to prosper from the lesson: average investors. As we’ve illustrated elsewhere, the comparatively low fees associated with index funds means investors stand to enjoy better returns than those of exotic index funds. Plus, index funds are much easier to access for the average investor. Many hedge funds require a $1 million investment minimum. Compare that to Zacks Advantage, for example, which has a minimum investment of just $50,000.
So if you’re considering investing, you could do worse than to take the advice of the Oracle of Omaha make sure low fee investments are a big part of your plan.
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