The Bet Between Buffett And Protégé Partners

We had this on Somersoft, so here's an update

Stakes

A $1 million donation to the winner’s charity of choice

The Bet Between Buffett And Protégé Partners

Summary

Warren Buffett argued that investors would be better off putting their money on S&P 500 Index Funds as the cost of hedge funds would undermine profits.

Protégé Partners argued that the best hedge funds will be able to make good long and shorts decisions regardless of the market thereby beating the market after deducting cost.

The historical trend shows that the average investors with little financial knowledge can profit from SPY n the long term. Current PE of SPY is too high to enter.

The Lesson for Every Investor From Warren Buffett's Million-Dollar Bet

In the recent Berkshire Hathaway (BRK.A, BRK.B) annual general meeting, Chairman Warren Buffett (a.k.a. the Oracle of Omaha) released the result of his bet with Protégé Partners, LLC. Buffett said this bet was featured on longbets.org.

At the end of December, with just two years left to run, Buffett maintains a commanding lead:

• Vanguard Index Fund Admiral Shares: 65.67%
• Protege Partners' portfolio of funds of hedge funds: 21.87%

Even Ted Seides, the then-Protege Partners' partner, who initiated the bet, admitted last year that "[t]he odds now are that we'll need to see a severe market contraction for our side of the ledger to state an epic comeback. No one wins when that occurs."

That's a little more humility than he demonstrated at the outset of the bet, when he estimated his chances of winning at 85%; Buffett, less overconfident, thought his odds of success were 60%.

 

Yes great post @Redwing, it has been interesting following that 10 year bet.

Certainly highlights how high fees and convoluted / overly active strategies can often kill returns. No doubt a good advert for simple, old fashioned, long term holding of low fee broad based share index funds.

 

It's great reading all the excuses given as to why they have been unable to beat the index. I'm of the opinion isn't this the kind of stuff people are paying you to predict and take advantage of as a hedge fund manager? To be fair he is a fund of funds manager so it's the people he selected that can't predict the markets.

If you ignore the fees charged by the hedge funds you would find they have under performed the index by a bit less. What a world where people pay millions to do so badly

 

Long/Short hedgies, "we can make money in any market conditions*"


*For ourselves.

 

Which also highlights another great difficulty in "choosing" Active / Hedge Fund Managers. Today's current high performing Fund superstars can be the flops of tomorrow. Consistent out performers are few and far between!

 

The bet concludes in January 2018

The real winners look to be "Girls Incorporated of Omaha"

$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.

 

It was this podcast on the million dollar bet that I listened to, that got me started into looking at index funds, which led to to this hidden gem "other asset classes", which also led me to LICs...

Episode 688: Brilliant vs. Boring

 

Buffett's $1 Million Bet: Index Funds vs. Hedge Funds

2/23/2017 12:46PM
Warren Buffett made a $1 million bet in 2007: that hedge funds would not outperform index funds over the next 10 years. WSJ's Nicole Friedman checks the numbers and handicaps Buffett's chances of winning the bet on Lunch Break with Tanya Rivero.

 

Even Berkshire looks to have trailed over the period of the bet

 

Interesting, wonder if the tech segment is a main driver of this.
Be interested to see BRK's revenue growth vs the index.

 

If I understand correctly, Buffet specifically pointed out the cost of the hedge funds to be the reason.

I would be curious to find out what the value would be for Protege Partners' portfolio if we removed the cost of the hedge funds and just showed straight profits. If it is still quite a lot under Vanguard, then the problem is not necessarily specifically the cost of the hedge funds but their selection.

 

If the pros can't beat the market, what chance do we have. This is why my investment plan is a mix of LICs and ETFs.

 

Yeah I agree.
I was more wondering if it is possible to confirm if the pros did not beat the market due to their selection or due to fees alone.

 

The hedge funds were down significantly before their fees last I checked. They had all manner of excuses.

 

Total guess but I am going to say selection and fees. I am sure there is analysis about it somewhere. It's a very important and high profile bet.

 

Interesting that the only year the hedgefund outperfomed the index was during the GFC.

They may control losses, however, they arent able to keep up when the markets turn.

Blacky

 

Downside protection comes at a cost.

 

So I had some free time and compared the s&p500 vs BRK.

Over the period of the bet the s&p500 has increased revenue by a total of around 11% and Berkshire has increased revenue by around 84.2%.

If the S&P paid a 2% (I believe the average is ~2.2%) dividend on average over the 9 years that is an additional 20% compounded. Still well behind the non dividend paying BRK.

Assuming parity of value at the start of the bet there are some unanswered questions on the value of the S&P500 vs BRK today.

 

@Hodor

Chart is from Morningstar data ?

 

The fund of funds has multiple hedge funds contained within it. Some beat the market, some didn't (which is what you'd expect I guess). On of the fund of funds (i think there is four?!?) actually delivered slightly below S&P500 returns but at a much lower volatility. Which is nice....

But there was four fund of funds. And the other three weren't great, even on a risk adjusted basis. And the fee layers - 2 % plus performance for the hedge funds, then 2% for the fund of funds manager.... its quite a hurdle.