Warren Buffet Will Win Bet That Index Funds Outperform Hedge Funds

A No-Brainer, and Here's the Key to the Victory

The reputation of Wall Street Hedge Fund managers continues to take hits.  These are not the smartest people in the world, they are some of the luckiest.  They get to make tons of money while their investors, well, not so much.  To prove this Warren Buffet made a big bet.

It was a $1 million bet: Could hedge funds outperform index funds over a decade?

Warren Buffett said no in 2007. Now it looks like the billionaire investor was right.

His chosen index fund, the Vanguard 500 Index Fund Admiral Shares, climbed 66% from the start of the bet through the end of 2015, compared with a gain of 22% for a basket of hedge funds selected by asset manager Protégé Partners, including fees.

The other side of the bet was Ted Seides who acknowledged the high fees but felt a good Hedge Fund would compensate for the high charges.

“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.

But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”

Hm, who was President When this Happened?

So how did he do it.  Simple, look at the last two words above "including fees".  See the fees are so high for the so-called geniuses that there is almost no way they can perform better than the market as a whole.  This doesn't mean they will not attract investors because you can fool some of the people, particularly wealthy people all of the time and Hedge Fund managers never give the sucker an even break.