Warren Buffett apparently made a bet 10 years ago that a basic S&P index fund with low fees would outperform hedge funds on aggregate. He put his money where his mouth was, offering a $500,000 bet to any hedge fund manager. The manager would have to pick 5 hedge funds and they would compare how the 5 performed against the Vanguard S&P 500 index fund.
I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?
What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides – stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.
Like Warren Buffett needs more money, but he won the bet. None of the five hedge funds individually outperformed the S&P 500 and on average the hedge funds returned 7.1% compared to the S&P 85%. Not even close.