Buffett vs. Hedge Funds

Years ago I had heard about a bet Warren Buffett made in 2007, and then on Tuesday Fortune wrote a follow-up article Warren Buffett adds to his lead in $1 million hedge-fund bet.

In 2007, Buffett made a wager with Ted Seides*, Co-founder, Co-CIO, and President of Protégé Partners, LLC, that the S&P 500 would outperform a collective group of five funds of hedge funds picked by Seides over a 10 year period.

The specific S&P 500 index fund Buffett picked was the Vanguard 500 Index Fund Admiral Shares (VFIAX). The names of the funds of hedge funds picked by Seides have not been published, most likely to conceal the fund managers’ embarrassment as VFIAX has gained 63.5% for the seven years since the initial wager compared to the collective 19.6% return (estimate as 2014 final figures were not available when the article was published) of Seides funds he selected.

The wager is now invested in Berkshire Hathaway B-shares worth $1.7 million dollars. Buffett is just doing what Buffett does best, winning. And if he does win, Girls Inc. of Omaha will be the lucky recipient of the wager.

I know that it is only seven years into a 10 year bet, but the selected funds have A LOT of ground to make up. Also, for those who think they can beat the market, here is another reason you will probably lose that battle.

Chalk one up for the the passive index investors!

-FF

* For those thinking “who is this Ted Seides character?” He is a graduate of Yale and Harvard, has his CFA, and co-founded Protégé Partners in 2002. I wonder if some of his investors ever wished they had just bought an index fund?

10 thoughts on “Buffett vs. Hedge Funds

  1. DivHut

    It’s amazing how simple investing techniques and patience can set you far ahead of most actively managed funds. I guess this is what we are trying to do by investing in in solid companies for the long term and simply reinvest and compound our dividends to create an ever increasing passive income stream. Thanks for sharing. 3 more years to go.

    Reply
    1. Fervent Finance Post author

      Agreed DivHut. As long as your portfolio holds enough stocks to hedge your risk of a single one going belly-up, then I like your strategy of basically creating your own dividend fund in which you plan to hold long term. Taking the emotions out of investing is key. Very hard to beat the management fees and tax implications of many funds of hedge funds. Thanks for stopping by.

      Reply
  2. Positive Carry

    I love Buffett, but as you said, “only seven years into a 10 year bet.” 99% or more of us should be passive investors but not sure this bet is the best case for it. I know it’s a big IF, but, what if Seides wins? Should we let this one off, meaningless publicity stunt sway our thinking? Most of us can be convinced of the merits of passive investing and diversification by reading “A Random Walk Down Wall Street” by Burton Malkiel or listening to Ric Edelman.

    Reply
    1. Fervent Finance Post author

      I would definitely not write off passive investing if Seides some how won this bet. I was just looking at it as another win statistic for passive investors if he didn’t. I’ll definitely check out that book recommendation. Thanks!

      Reply
  3. Mrs. Maroon

    Stories like this just help to solidify the KISS method… Keep it simple stupid. What could be easier than a hands off index fund from Vanguard? Easing your mind that it does better than just about every single actively managed find out there…

    Reply
    1. Fervent Finance Post author

      I’ve never seen the KISS acronym used, but I like it! But you are correct about easing the mind with index funds. I use the rotisserie chicken method of “set it and forget it!”

      Reply
      1. Fervent Finance Post author

        Brian – Luckily my current employer uses Vanguard to administrate their 401k plan. It’s nice having my IRA and 401k in one place, and at Vanguard nonetheless. Hopefully your employer will make the switch eventually!

        Reply
  4. Mr. 1500

    I first heard of this bet at the Berkshire meeting a couple years ago and I love it! Buffett and Munger are just great.

    You should try to make it to a Berkshire meeting too. Where else can you rub elbows with a billionaire? He walks around the exhibit hall, mere feet away from you. Also, Buffett and Munger say plenty of great stuff that never seems to be reported by the mainstream press. I have vowed to go every year that Buffett and Munger are alive. Maybe even after.
    Mr. 1500 recently posted…Thursday non-rant: Home improvement updateMy Profile

    Reply
    1. Fervent Finance Post author

      I’ve researched the annual stockholders’ meeting, and it seems to become more of a spectacle every year. With hotels charging through the nose, and every one else catering to the attendees trying to squeeze every last penny out of them. But yes for years I contemplated going when I held some BRK to see my idol! I also love Munger too. Thanks for stopping by Mr. 1500!

      Reply

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