The Long Bet

[redwing]

There's an interesting articile here on The Long Bet

Buffett Vs Hedge Funds

Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn’t beat the stock market over a decade. So far he’s winning.

The wager that began on Jan. 1, 2008, pits the Omaha, Nebraska, billionaire against Protégé Partners LLC, a New York fund of hedge funds co-founded by Ted Seides and Jeffrey Tarrant. Protégé built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor’s 500 Index. The winner’s charity of choice gets $1 million when the bet ends on Dec. 31, 2017.
Cont...........

Link

Long Bets site and the bet

“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.”

PREDICTOR
Warren Buffett

CHALLENGER
Protege Partners, LLC

STAKES $1,000,000

• will go to Girls Incorporated of Omaha if Buffett wins,
• or Friends of Absolute Return for Kids, Inc if Protege Partners, LLC wins.

http://longbets.org/362/

 

[matto_]

May just go to show it is safer being in low priced LIC's than expensive managed funds.

 

[Graemsay]

Buffet is running on percentages and statistics.

A hedge fund is likely to be charging its traditional 2 and 20, with a fund-of-funds levying a further management fee on top of it. It's hard for an investor to outperform the stock market long term, but the counterparty in Buffet's bet will need to beat it by 4 or 5% to overcome these.

The man himself reckoned he has a 60% chance of winning, though the odds would be worse if it was against a single hedgefund.

 

[redwing]

The man himself reckoned he has a 60% chance of winning, though the odds would be worse if it was against a single hedgefund.

And probably better over a longer period

I've read of some great fund managers beating the index by up to 11+ years, then falling from grace

 

[Aaron_C]

Pretty simple arithmetic, really. Funds of Funds (FoF) take the 2% pa fee + 20% of gross return as a fee. So just to get a 7% net return for the investor the hedge fund has to make a total gross return of about 11%. That requires huge leverage and risk, and is not that easy even for skilled fund managers due to the sheer size of their transactions. I would definitely be sticking my bet with Buffett on this one.

 

[Graemsay]

And probably better over a longer period

I've read of some great fund managers beating the index by up to 11+ years, then falling from grace

I've heard various figures for the odds of beating the stock market index, ranging from 1 in 4 to 1 in 40, and I'd agree that it will be harder over the longer term.

Incidentally, whilst doing a quick Google, I found a piece in which Benjamin Graham advocates building a broad portfolio, but rejecting the obvious dogs.

 

[redwing]

update from fortune

It's halfway time in the 10-year stock market wager sometimes called The Million-Dollar Bet—that's Warren Buffett backing the performance of an S&P index fund vs. a New York money manager backing five funds of hedge funds—and there's double-barreled news.

Item One: For the first time since the bet started five years ago, Buffett has moved ahead—by an okay margin to boot.
Item Two: For the first time ever as well, both sides have crawled out of the ditch (though the funds of funds barely made it) and are showing positive results.

About that history of bad results, of course, you need to keep in mind that this bet started in the gut-wrenching year of 2008, which left both contenders deep in the red. Buffett, though, was definitely a deeper shade of red: Vanguard's Admiral shares—the S&P index fund he'd backed—lost 37% in 2008 vs. a 24% drop, on the average, for Protégé's five funds of funds.

Reporting on that first year of the bet, Fortune quoted Buffett as just hoping he could be like the fabled tortoise that ultimately passes the hare.

So now the tortoise, after crawling four more years, indeed leads. At the five-year mark, the Vanguard index fund backed by Buffett is up by 8.69%. The five funds of funds picked by Protégé Partners to carry its flag in the race are up, on the average, only—"gulp," says Protégé partner Ted Seides—0.13%.
By the terms of the bet, the identity of those five funds has never been made public. It has always been assumed, however, that one of them is a fund of funds run by Protégé itself.

The strength of 2012's stock market is naturally what carried the contestants into the black. The market's vigor is displayed in the performance of the index fund, which rose by 15.96% last year. In contrast, the five funds of funds managed a 2012 gain, on the average, of only 6.46%.

From his trailing position, and probably having heard enough about the tortoise, Protégé's Seides imagines an alternative future for the bet by recalling the movie, City Slickers. In it, says Seides, "Billy Crystal's character asks Jack Palance's character, Curly, if he has killed anyone today—and Curly answers, 'Day ain't over yet.'"

cont...

 

[redwing]

Update here

Buffett has big lead in bet against hedge funds

In a Fortune piece, long-time Buffett friend Carol Loomis writes that after six years the fund Buffett selected for the wager, the Vanguard 500 Index Fund Admiral Shares, was up 43.8 percent at the end of 2013.

The other side of the bet is a collection of five hedge funds of funds chosen by New York-based Prot?g? Partners.

After all fees, their average gain was about 12.5 percent. The names of the funds have not been revealed.

After trailing for the first four years, Buffett's choice pulled ahead at the bet's halfway mark, with a gain of 8.69 percent vs. 0.13 percent for the hedge funds as of the end of 2012.

Originally the pot consisted of zero-coupon bonds that would be worth $1 million when the contest ended. Due to low interest rates, however, the value of the bonds came close to the target by the end of 2012. The two sides agreed to sell the bonds and buy Berkshire stock with the proceeds.

That turned out to be a good decision, as shares of Buffett's company soared more than 32 percent last year.

 

[redwing]

Looking forward to 2015's update

In 2014 the hedge fund was up to 12.5% after fees, while Buffett was up to 43.8% after fees

 

[redwing]

The Hedge Fund in the bet is losing and isn't happy

Link

The duo laid out their opposing theses in 2008: Buffett said investors are best served over long time horizons with investing in low-cost index funds that track the broad markets as opposed to paying substantial management fees, active trading costs and so on. Prot?g? Partners, which invests in small hedge funds, countered that a more aggressive, and expensive, strategy would pay off.

To raise the stakes, Buffett and New York-based Prot?g? agreed the loser would give a charity of the winner?s choice $1 million based on whose strategy provided better returns over the course of a decade. Through a serendipitous chain of financial events, the winning charity actually stands to glean closer to $1.68 million.

To say the Oracle of Omaha is winning the bet puts it lightly. Buffett?s cumulative return in the Vanguard 500 Index Fund Admiral Shares (VFIAX) is 63.5% over seven years, or 7.3% per year (the figures don?t sum due to compounding). Meanwhile, Prot?g??s pick of five anonymous funds of hedge funds has returned a relatively paltry 19.6%, or 2.6% per year (the numbers are subject to change because the 2014 figures are still trickling in).

Prot?g? defended its business in a note written by Seides Thursday on the Yahoo Finance Contributors Network, saying, ?We believe that those extrapolating the recent past to call for the demise of the hedge fund industry are probably a bit extreme.?

The firm, which was founded in 2002 by Jeffrey Tarrant and Seides, said management and performance fees accounted for 24.4% of the underperformance ? representing just north of half of the overall gap of 43.9%. The other 19.5% came from two more surprising sources.

?We believe the headwinds faced by hedge funds have resulted from a combination of the substantial outperformance of the S&P 500 over global equity markets and the adverse impact of the Fed?s Zero Interest Rate Policy ? on hedge funds relative to other investment vehicles,? Prot?g? said in the note.

?Together these factors wreaked havoc on a bet whose prospects we initially felt quite confident.?

Digging into the details, Prot?g? said the S&P 500, an index of large capitalization U.S. companies, isn?t a fair benchmark for hedge funds that tend to diversify globally and have a bias toward small cap. stocks, calling it an ?apples-to-oranges comparison.?

 

[Intrinsic_Value]

Buffet will win hands down.

He timed the bet beautifully.

ie the bet wasn't just a bet taken at any time, the bet was taken at the right stage in the market for him.

All the stars were aligned.

 

[Blacky]

Would be interesting to run a back checking calc to see if the same funds would have won over any ten year period in the past.

I don't have the technology to do so

Blacky