American investor and philanthropist Warren Buffett, who has made billions through his company Berkshire Hathaway, is currently winning a bet with the hedge fund company Protégé Partners LLC.
Nine years ago, Buffett issued a challenge to the hedge fund industry as a whole that nobody could put together a portfolio which could outperform a Standard and Poor’s 500 (the largest companies with stocks listed on NASDAQ or NYSE) over a ten-year period.
Protégé Partners LLC accepted the $1m bet, payable to a charity of the winner’s choosing. With less than year to go, it looks like they’ll be the ones making the donation, to Girls Inc of Omaha, as Buffett, often regarded as one of the best investors in the world, is killing it.
Buffett chose the Vanguard S&P500 index fund and Protégé picked five hedge funds, the names of which haven’t been disclosed, although we do know that they chose ‘funds of funds’ - funds that own a portfolio of positions in a range of hedge funds.
As of last year, Buffett’s pick is up by 65.67%, while Protégé’s selections were up by only 21.87%. Buffett has been an outspoken critic of hedge funds for many years, objecting to the high fees the managers earn from their clients.
While the manager at Protégé who accepted the bet (Ted Seides) is no longer there, he was meticulous in gathering data and monitoring the funds. This was necessary because rather than putting up money for the wager, each side invested smaller amounts with the intention of building the pot to $1m over the course of the decade.
Part of the reason for Protégé’s failure is due to the fees in the hedge fund industry, which is usually 2% plus an incentive of the profits of 20%. Buffett’s single fund only charges 0.05% expenses, so the hedge funds had to do far better just to break even.
Choosing the funds of funds made their chances of success even lower, as they had to deal with a second level of fees – those who select the hedge funds ask for a fee too. Many observers believe that Protégé were doomed to fail from the outset.
At Maven Adviser we create carefully selected portfolios using index and passive funds. So we’re in agreement with the mighty Mr Buffett. It’s alarming however how people still think ‘out performance’ is a goal in itself. Your portfolio is the funding vehicle of your lifetime financial plan, so is therefore servant to your life goals.
Multi decade investing is about avoiding the big mistakes, rather than shooting the lights out. Investing should be boring, consistent and lowering your fund fees is a worthy pursuit, as my great teacher has shown here.