Warren Buffet did not believe hedge fund managers’ exorbitant fees for actively managed money were justified based on performance. So, in 2008, he challenged active managers in the hedge fund industry to a one million dollar bet.
It was to be a classic showdown: actively managed money attempting to profit by anticipating future market trends, versus the slow and steady strategy of passive investing buying the market in a low cost investment on a buy and hold bases.
Accepting the challenge from New York City was Protégé Partners LLC.
The bet was whoever had the highest return after 10 years would be the winner and the money would be donated to a charity of their choice.
In the first year of the competition, the stock market crashed and the index fund that Buffet had invested lost 37 per cent of its value. The hedge fund only lost 24 per cent.
The index fund performed better in each of the following six years. Then in 2015 Buffet’s one year return lagged by a small fraction of 1 per cent.
With one year remaining in the competition, the Protégé Partners conceded defeat.
By the end of 2016, the index fund posted an annual 7.1 per cent return over the previous nine years. That figure included the huge loss suffered in 2008 when the stock market plunged.
The hedge fund return for the comparable time period was an annual return of 2.2%.
Buffet’s position was active management with its high fees would not win.
Protégé Partners acknowledged fees but added that market risk sometimes matters more. The notion is that high fees produce better results and therefore justified.
The two sides adjusted the terms of the bet during the competition and the money was $1.4 million. Warren Buffet’s charity of choice to receive the money was Girls Incorporated of Omaha.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.