Buffett pulls ahead of Hedge Funds at halfway point of bet

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Buffett pulls ahead of Hedge Funds at halfway point of bet

Postby jbran99 » Thu Jan 24, 2013 11:54 am

Carol Loomis has released the post-2012 update to Warren Buffett's bet with Ted Seides from Protege Partners: http://finance.fortune.cnn.com/2013/01/ ... ?iid=HP_LN

Summary: The S&P500 Fund Buffett selected is Vanguard's Admiral shares (VFIAX). According to Loomis, that fund is up 8.69% compared to the five "fund of funds" hedge funds, which is barely above water (on average) at .13%, dating back to 1/1/2008.

Another feather in the cap of low cost index funds, not that any Bogleheads needed it. Still, if it convinces someone else to give up on actively managed funds in favor of low-cost indexing, that's probably a good thing.

Edit: The details on the actual bet can be found here: http://longbets.org/362/
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby larryswedroe » Thu Jan 24, 2013 12:32 pm

last 10 years HFRX Global Hedge Fund Index up 1.7% underperforming every major equity and bond asset class, even virtually risk 1-year treasuries
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby kenyan » Thu Jan 24, 2013 12:51 pm

Thanks, was looking for the update on this, as I knew he would've pulled ahead with last year's market performance. It's unfortunate that the bet was made just before the Great Recession, as a huge bear market is one time when the Hedge Funds might be expected to win.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby Nathan Drake » Thu Jan 24, 2013 5:09 pm

Do these results take into account Hedge Fund expenses?
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby dad2000 » Thu Jan 24, 2013 5:19 pm

My recollection from previous articles is that expenses are accounted for, but taxes are not.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby Rainier » Thu Jan 24, 2013 5:22 pm

Or taxes?

If so, makes indexing even better.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby NOLA » Thu Jan 24, 2013 5:25 pm

Thanks for the updated. Hadn't heard about the bet until today..
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby HomerJ » Thu Jan 24, 2013 5:27 pm

kenyan wrote:Thanks, was looking for the update on this, as I knew he would've pulled ahead with last year's market performance. It's unfortunate that the bet was made just before the Great Recession, as a huge bear market is one time when the Hedge Funds might be expected to win.


Actually, it's very fortunate that the bet was made when it was made...

Because if there was just an extended bull market after the bet was made, people could always claim... "Well, active managers do better in Bear markets while index funds have to blindly dive off the cliff"... But if Buffet wins this bet, it shows that index funds out-perform active funds even during 10-year periods that include bear markets.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby dad2000 » Thu Jan 24, 2013 5:33 pm

I agree with HomerJ.

Also, you can be sure that when Buffett wins, the excuse will be that the hedge funds did a better job of managing the risk.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby matjen » Thu Jan 24, 2013 10:30 pm

Dad2000 wrote: Also, you can be sure that when Buffett wins, the excuse will be that the hedge funds did a better job of managing the risk.


Funny, I was thinking the same thing. When they are doing well, the Hedge fund guys tout their outsized returns and that they are the smartest guys in the room. When things go poorly for them they tout risk management and safety relative to the general markets. Heads they win, tails they win. Regardless, most of their customers lose. :oops:
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby NYBoglehead » Thu Jan 24, 2013 10:53 pm

kenyan wrote:Thanks, was looking for the update on this, as I knew he would've pulled ahead with last year's market performance. It's unfortunate that the bet was made just before the Great Recession, as a huge bear market is one time when the Hedge Funds might be expected to win.


I think the next 5 years will make a huge difference anyway and at the end of the 10 years the fund of funds will be way behind the index fund. Wonder why WB went with the S&P 500 fund instead of TSM.

The funny thing of course is at the end of the 10 years when WB wins the bet the financial media will spend 30 seconds reporting it. As I've said before, so long as only the uber wealthy dopes are the ones invested in hedge funds I couldn't care less about their performance. Let's just make sure public dollars (municipal pensions, etc) don't find their way into the horrible investments.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby Drew31 » Fri Jan 25, 2013 12:38 am

matjen wrote:
Dad2000 wrote: Also, you can be sure that when Buffett wins, the excuse will be that the hedge funds did a better job of managing the risk.


Funny, I was thinking the same thing. When they are doing well, the Hedge fund guys tout their outsized returns and that they are the smartest guys in the room. When things go poorly for them they tout risk management and safety relative to the general markets. Heads they win, tails they win. Regardless, most of their customers lose. :oops:



I think the foundation for the risk argument is already being laid......

http://finance.yahoo.com/news/buffett-w ... 13555.html

In arguments on a web site recording the wager, Protege contends that hedge funds are trying to "generate positive returns over time regardless of the market environment," not just beat the market. Even so, through a cycle, "top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well."
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby jon-nyc » Fri Jan 25, 2013 5:18 am

NYBoglehead wrote: As I've said before, so long as only the uber wealthy dopes are the ones invested in hedge funds I couldn't care less about their performance. Let's just make sure public dollars (municipal pensions, etc) don't find their way into the horrible investments.


Too late. Whereas 10 years ago hedge funds mostly attracted funds from wealthy individual and family offices, today most of their new funds are institutional.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby lindisfarne » Sun Jan 27, 2013 2:02 am

Article over at bankrate.com

A beta of 1 means an investment is as volatile as the stock market. A low beta indicates less volatility and risk as well as lower returns. Even if a hedge fund generates enough risk-adjusted return to overcome fees, "They may still underperform the market because they partly hedge their bets. They are less risky than index funds are, but Warren Buffett's bet ignores that risk. Over a 10-year period it is more likely that the S&P 500 index will increase in nominal terms. So, funds of hedge funds have three handicaps they have to tackle to beat passive investing: hedge fund fees, (fund of funds) fees, and their low betas," according to the Insider Monkey story, "Investing in funds of funds is a dumb idea."

"I like Buffett's chances of success simply because every single year, his fund only has to overcome a fee of 0.05 percent -- assuming he is using Vanguard 500 index Admiral -- as compared to the multitier and profit-sharing component of the hedge funds, which could be as much 3.25 percent in management fees and profit-sharing components," says Robert Laura, president of Synergos Financial Group in Howell, Mich.


Read more: http://www.bankrate.com/financing/inves ... z2J9Xs5zZk
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby matjen » Sun Jan 27, 2013 10:25 am

Hey George Soros is chiming in on these topics now. When Soros and Buffett agree on a financial topic it probably makes some sense to listen. The important thing about this video is that not only is he essentially saying the Hedge Fund trade is "crowded" and they will under perform because of fees, but he puts to bed any notion that they somehow are less volatile.

http://www.bloomberg.com/video/soros-th ... KFQbg.html
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby thebogledude » Sun Jan 27, 2013 10:37 am

Just saw a clip on Fox Business with the S&P 500 at a five year high.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby peppers » Sun Jan 27, 2013 10:42 am

matjen wrote:Hey George Soros is chiming in on these topics now. When Soros and Buffett agree on a financial topic it probably makes some sense to listen. The important thing about this video is that not only is he essentially saying the Hedge Fund trade is "crowded" and they will under perform because of fees, but he puts to bed any notion that they somehow are less volatile.

http://www.bloomberg.com/video/soros-th ... KFQbg.html


For a while there he sounded like John Bogle. Thanks for the link.
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Re: Buffett pulls ahead of Hedge Funds at halfway point of b

Postby SSSS » Sun Jan 27, 2013 10:49 am

Nathan Drake wrote:Do these results take into account Hedge Fund expenses?


Rainier wrote:Or taxes?

If so, makes indexing even better.


Expenses are definitely factored in to the fund returns. Taxes are almost certainly ignored, because taxes would be different for each person holding the fund. Would we be using Warren Buffett's tax rates? Ted Seides's tax rates? Warren Buffett's secretary's tax rates?

Do we know if they're reinvesting dividends and capital gains distributions?

Also, it seems kind of like this bet is going to be determined solely by the performance of the S&P 500 index itself. If there's an S&P 500 crash in the last year, (and assuming the hedge funds as a whole are not significantly long in large-cap US stocks at the time), then Buffett is just out of luck. If the S&P 500 does well in the last few years, then it's pretty much a foregone confusion in Buffett's favor. So there doesn't seem to be much scientific value here.
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