Warren Buffett made a million dollar bet

Warren Buffett made a million dollar bet

by Roman on June 27, 2008

Warren Buffett has made a million dollar bet that the S&P 500 index fund will return more to investors over the next 10 years than a collection of hedge funds that are carefully selected by experts.

The bet was made between Buffett and a company called Protégé Partners LLC – a company that specializes in running funds of funds. Those in the dark – a fund of funds is just like a hedge fund but instead of owning stocks or bonds, it owns other funds.

This has some positive and negative aspects.

The Good

A fund of funds is extremely diversified. Since it consists of funds that each consist of hundreds of stocks it is relatively risk free. This is good during the bad times.

The Bad

When compared to owning stocks or index funds a fund of funds has extremely high fees. Such a fund has an annual management fee of 1% and each one of the funds that it consists of have fees of about 1,5%  a year. In contrast –  owning the Vanguards S&P 500 index fund has a yearly fee of only 0,07%.

Hedge funds also typically collect 20% of the gains they make – this leaves you 80% of which the fund of funds also takes its share – typically about 5%.

Why Buffett Decided to Take This Bet

The high management fees of funds of funds are what Buffett thinks will win him the bet.

In order for a fund or a fund of funds to equal the return of the S&P 500 index, it has to have a lot higher yield than the index. Buffett is essentially saying that even if the fund he is betting against can surpass the yield of S&P 500, the costs associated with the fund will be so high that net of all fees the yield of S&P 500 will be greater than the fund of funds Protégé Partners is running.

You can read Warren Buffett’s and the Protégé Partners views on the bet at Long Bets.

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{ 5 comments }

Nick June 30, 2008 at 1:14 am

This is quite interesting, but with all the fees, I think it would be really tough for that fund to beat the index…especially because with most hedge funds, you can’t buy and sell at will (they typically have “open periods” to allow for this) so the fund of funds is kinda locked in.

This will be something interesting to keep an eye on and see who is winning :D

Hey! Arnold August 22, 2008 at 10:35 am

Hey Warren, how did you do it? Any ideas to share with some of us… LOL.

henandri September 14, 2008 at 9:50 pm

mr warren buffet helpme please mayday mayday help me please iam need you can be help me please!!!!!

Howard October 30, 2008 at 5:54 pm

The odds of Warren reading this blog are lower than the odds of 1 dollar showing up in my paypal account from his e-mail adress.

Howard October 30, 2008 at 5:57 pm

However, If the odds where to move in your favor, I hope he sends more than 1$

K thanks by ^^*

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