Warren Buffett always viewed hedge funds as an industry that charged excessive fees for low performance. With that, Buffett set a decade-long bet against Protégé Partners LLC that their select hedge funds wouldn’t outperform the S&P 500, standing firm with his belief that there was no doubt that he would win.
In 2007, Warren Buffett challenged the hedge fund industry to a 10-year bet that proved the S&P 500 would perform better than a basket of hedge funds. After a decade, Warren Buffett won as his index fund gained 5% more than the select hedge funds.
The Winning Bet That Lasted a Decade
In a 2007 bet between Warren Buffett, the CEO of Berkshire Hathaway, and the Protégé Partners LLC, Warren Buffett challenged the hedge fund industry for a million dollars. Warren Buffett’s deal wagered the performance of a basket of hedge funds against the S&P 500 index in a decade, stating that the S&P 500 index would perform better than hedge funds. His challenge ultimately pits active investing and passive investing against each other. (Source: Investopedia)
A 2018 article by the Business Insider showed the progress that both parties gained – stating that S&P 500 obtained a higher annual gain in ten years.
The Berkshire Hathaway chairman in 2007 bet $1 million of his money that the S&P 500 would outperform a selection of hedge funds over the following ten years. As of last week Friday, his S&P 500 index fund compounded a 7.1% annual gain over that period. The basket of funds selected by Protégé Partners – the managers with whom he made the bet – gained 2.1%.Business Insider
The bet started with the two parties putting $320,000 into a zero-coupon Treasury bond that they assumed would turn into a million dollars in 2018. The class B shares of Berkshire Hathaway rose quicker more than expected, and the 11,200 shares the company bought in 2012 carried the worth of more than $2,000,000.
The winning bet Warren Buffett proposed to the hedge fund industry proved his beliefs that the hedge fund industry charged obscene fees to clients for quality performance. Ultimately, his challenge emphasized the value a passive investor obtains with index funds and the massive payments that accompany hedge funds. (Source: Business Insider)
The Doubts Within the 10-Year Challenge
The triumph of Warren Buffett didn’t always seem so guaranteed. A year after the bet began, the hedge fund showed great potential in winning as the market tanked. While Buffet’s index fund value decreased more than 35%, the hedge funds’ only lost 23.9%.
The gain of hedge funds became short-lived as Buffett’s index fund beat the hedge funds from 2009 to 2014. With that said, Buffett needed to dedicate four years to win against the hedge funds regarding their cumulative return.
When 2015 came, Protégé gained 1.7%, which was .3% more than Buffett’s. Buffett immediately pulled ahead the following year as they gained 11.9%, to which the hedge fund industry only gained .09%. In late 2016, Buffett remained triumphant as his index fund obtained an annual 7.1% or $850,000, while Protégé only gained 2.2% or $220,000.
With his win, Warren Buffett donated the money to Girls Incorporated of Omaha, a provider of basic hygiene, health, and education resources for young women and their families. If Protégé avoided the loss, the Friends of Absolute Return for Kids would receive the prize. (Source: Investopedia)