Buffett gains ground in hedge fund bet

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Buffett gains ground in hedge fund bet

Postby VennData » Wed Mar 21, 2012 10:05 am

http://finance.fortune.cnn.com/2012/03/ ... /?iid=Lead

He's gonna win this one.

I wonder if the taxes are taken into account.

Hedge funds are tax inefficient in the extreme for then limiteds. And the ETF version of the "...Vanguard Admiral shares..." are free of most capital gains.
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Re: Buffett gains ground in hedge fund bet

Postby VennData » Wed Mar 21, 2012 10:15 am

In a period of declining interest rates, which we certainly have had, what happens to a zero-coupon bond is that its market price races toward the maturity value -- $1 million in this case. Recently, the value of the Buffett-Protégé bond was about $930,000, which means that in just over four years it is up 45% from the purchase price.... Both Buffett and Ted Seides, the Protégé partner who engineered the 10-year-bet, are well aware that the returns to be earned by the zero-coupon bond from its price today can be no better than meager for the nearly six years left in the bet. That's because the ceiling is the bond's maturity value of $1 million. The view is definitely unappealing, says Seides: "We're looking at annual returns that won't be much better than 1%... So the two sides began a few weeks ago to talk to the Long Now Foundation about its selling the zero-coupon bond and putting the proceeds into an investment that putatively could deliver the winning charity more than $1 million when the bet winds up. The first plan discussed was for half of the proceeds to be invested in Buffett's company, Berkshire Hathaway (BRKA), and the other half to be invested in a fund of funds that Protégé runs (and that has always been assumed to be one of the five funds of funds that Protégé picked for the bet). But that plan died because it would have required Long Now to become a partner in the fund and, for complex reasons arising from the securities laws, it did not meet the definition of a "qualified purchaser." So a second plan was devised and is now going forward. It calls for the bond to be sold and the total proceeds to be invested in Berkshire Hathaway stock..."


Shouldn't they toss it all into SCV... "Vanguard Admiral shares?"
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Re: Buffett gains ground in hedge fund bet

Postby neurosphere » Wed Mar 21, 2012 11:01 am

VennData wrote:I wonder if the taxes are taken into account.


Taxes? What about hedge fund fees? I have to read the details of the bet. But does anyone know if the hedge funds in this bet are charging the "2+20%" fees which are typical?

Because if any hedge fund "profits" are going to get docked 20%, I can't see how they can win this bet. Is it a fair bet if the hedge funds performance is offered "at cost" which is unavailable to the average investor, i.e., hedge funds do not give investors the return of the underlying funds...they give a PORTION of the underlying performance, and keep the rest as fees.

Of course vanguard does exactly the same, they give a PORTION of the underlying return, but keep the expense ratio. In the case of the admiral shares, the fee is built in to the return (assume no brokerage fees). And any individual can purchase the admiral shares with enough of a starting investment.

So I would hope the hedge fund returns would also be net of fees in the same way. If I gave $1M to purchase the hedge funds used in this bet, what would the fees be for me, and are they included in the bet?

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Re: Buffett gains ground in hedge fund bet

Postby neurosphere » Wed Mar 21, 2012 11:05 am

This article implies, but does not make explicit, that the fees are included:

http://www.sfgate.com/cgi-bin/article.c ... -M18JX.DTL

In addition to the 2 percent management fee and 20 percent performance fee that hedge funds typically charge, the funds of funds add another layer of fees, on average 1.25 percent of assets and 7.5 percent of any gains, according to data compiled by Bloomberg.


Edit: I was able to confirm that the bet will not take taxes into account.

But the actual hedge funds chosen (actually, it's 5 different fund of funds) and not publicly disclosed due to industry regulations. So there is no way to know the actual fees charged, which is why it seems all the articles cite the average hedge fund fees, and the average fees for companies which bundle funds, into 'funds of funds'.

Now that I think about it, of COURSE Buffet made a bet which takes costs into account. Because that's his whole point, no? :happy

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Warren Buffet gets too much credit

Postby hazlitt777 » Wed Mar 21, 2012 12:24 pm

[link to highly politicized criticism of Buffett deleted by admin alex]
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Re: Warren Buffet gets too much credit

Postby neurosphere » Wed Mar 21, 2012 12:56 pm

[comment on deleted comment removed by admin alex]

However, in regards specifically to this bet, I do not see how Buffet's biases alter affect his opinion (which is well documented in academic studies) that over time, active management will lose out to passive investing due to fees. In this bet, he specifically targets potentially one of the most fee-laden investment options, hedge funds. Buffet has a business to run, and a public portfolio to manage. But I do not think buffet's "crony capitalism" affects one of the underlying premises of his bet: that when taking costs into account, all of the smartest minds and best technologies will not beat the market averages. If fact, if Buffet were truly biased, he would be taking the OTHER position, that "a great mind such as mine will add value and will make you money net of fees...so invest with me!" Note, he did NOT offer up Berkshire Hathaway stock to bet against the hedge funds. Instead he chose the SP500.

Anyway, the bet is not so much as being about Buffet, as it is about low-cost investing. It's just that in this case Buffet has the voice (and dollars!) to give some publicity to the benefits of low cost investing. there are BILLIONS of dollars advertising for the other side, with which index fund investing will never compete. So this bet helps to be a voice for the truth against the big-money firms and unscrupulous advisers which claim that higher costs-->higher returns due to added value.

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Re: Warren Buffet gets too much credit

Postby hazlitt777 » Wed Mar 21, 2012 6:33 pm

neurosphere wrote:However, in regards specifically to this bet, I do not see how Buffet's biases alter affect his opinion (which is well documented in academic studies) that over time, active management will lose out to passive investing due to fees. ....Buffet has a business to run, and a public portfolio to manage.

...Anyway, the bet is not so much as being about Buffet, as it is about low-cost investing. It's just that in this case Buffet has the voice (and dollars!) to give some publicity to the benefits of low cost investing. So this bet helps to be a voice for the truth against the big-money firms...

NS


Why would one use Buffet as an example of support for indexing when he runs an actively managed fund and many people use him to point to the reason active managing is better.

We give him too much credit and forget if you are well connected, of course you will outperform the market...for awhile. It is a little like inside trading. I think he is a political animal and wish posters about him realized this. His wager is a red herring in my opinion.
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Re: Buffett gains ground in hedge fund bet

Postby schwarm » Wed Mar 21, 2012 8:00 pm

Thanks for the update.
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Re: Warren Buffet gets too much credit

Postby avmax8 » Wed Mar 21, 2012 8:05 pm

hazlitt777 wrote:
neurosphere wrote:However, in regards specifically to this bet, I do not see how Buffet's biases alter affect his opinion (which is well documented in academic studies) that over time, active management will lose out to passive investing due to fees. ....Buffet has a business to run, and a public portfolio to manage.

...Anyway, the bet is not so much as being about Buffet, as it is about low-cost investing. It's just that in this case Buffet has the voice (and dollars!) to give some publicity to the benefits of low cost investing. So this bet helps to be a voice for the truth against the big-money firms...

NS


Why would one use Buffet as an example of support for indexing when he runs an actively managed fund and many people use him to point to the reason active managing is better.

We give him too much credit and forget if you are well connected, of course you will outperform the market...for awhile. It is a little like inside trading. I think he is a political animal and wish posters about him realized this. His wager is a red herring in my opinion.


I think this is why...

1. ..the best way to own common stocks is through index funds...
- Warren Buffett, Berkshire Hathaway Inc. 1996 Shareholder Letter

2. Additionally, those index funds that are very low-cost (such as Vanguard’s) are investor-friendly by definition and are the best selection for most of those who wish to own equities.
- see page 10 of Berkshire Hathaway Inc. 2003 Annual Report

3. Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous. - page 5, 2004 Berkshire Hathaway Annual Report

4. Most investors, both institutional and individual, will find that the best way to own common stocks (shares¹) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and
expenses) of the great majority of investment professionals.² - Warren Buffett, 1996. Annual Report, Berkshire Hathaway.
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Re: Buffett gains ground in hedge fund bet

Postby xerty24 » Wed Mar 21, 2012 8:14 pm

VennData wrote:He's gonna win this one.

You do know he's still losing, right? Here were the 4 year cumulative performance numbers:

All of which leaves tortoise and hare gasping alongside each other at the end of four years -- and having absolutely nothing to cheer about. Protégé is still a bit ahead. But its funds of funds, on the average, are in the minus column for the period by 5.89%. Admiral shares are down 6.27%.


Even if they have the same average returns, there's going to be a nice diversification benefit if the hedge funds do better (losing lots less) during big crashes like 2008.
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Re: Buffett gains ground in hedge fund bet

Postby abuss368 » Wed Mar 21, 2012 8:28 pm

Mr. Buffett is usually right about a lot of things. Looking forward to reading his book "The Snowball".
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Re: Warren Buffet gets too much credit

Postby VennData » Wed Mar 21, 2012 9:18 pm

hazlitt777 wrote:Why would one use Buffet as an example of support for indexing when he runs an actively managed fund and many people use him to point to the reason active managing is better.


He made the bet, the right side if the bet. He is an investment icon, an American hero.
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Re: Buffett gains ground in hedge fund bet

Postby MarginOfBuffett » Thu Mar 22, 2012 1:23 am

abuss368 wrote:Mr. Buffett is usually right about a lot of things. Looking forward to reading his book "The Snowball".


"The Snowball" was written by Alice Schroeder, not Buffett.
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Re: Buffett gains ground in hedge fund bet

Postby dumbmoney » Thu Mar 22, 2012 6:16 am

S&P 500 is up 12% YTD so he may be ahead now.

But the real winner was the zero coupon bond funding the bet!
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Re: Buffett gains ground in hedge fund bet

Postby matjen » Thu Mar 22, 2012 8:56 am

Buffett (as a proxy for Bogle I might add!) has taken the lead when Q1 is considered.


"The first two months of this year pushed the Vanguard fund ahead as stocks returned 9 percent, more than twice the gains of hedge funds."

http://www.bloomberg.com/news/2012-03-2 ... funds.html
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Re: Buffett gains ground in hedge fund bet

Postby xerty24 » Thu Mar 22, 2012 12:34 pm

dumbmoney wrote:But the real winner was the zero coupon bond funding the bet!

Yeah - did you see where Buffett said the remaining YTM on the bond was so low (<1%) that it would be a poor investment and he offered to put the money into Berkshire stock instead? I think he also wrote them a put, so if the stock was down enough that the total at the end would be less than the $1M, he'd make up the difference personally. Sounds like a little active management ;).
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Re: Buffett gains ground in hedge fund bet

Postby abuss368 » Thu Mar 22, 2012 5:24 pm

I understand "The Snowball" was not written by Mr. Buffett as I have a copy of the book. However, he allowed unprecedented access to write the book. I understand the reviews were very good. Has anyone read it?
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Re: Buffett gains ground in hedge fund bet

Postby VennData » Thu Mar 22, 2012 5:39 pm

I've engaged in these wagers before. Easy to set up the stocks the other person wants in a google docs spreadsheet you share versus your ourperforming TSM SCV split.

It is a good help to people who do not accept the cognative bias they have. Warren Buffet is doing a service here.

Also, the fee drag from these do not seem to re-frame the Consumer's "Price-Quality Effect" and is why Wall Street financial advisors, hedge funds and money managers, continue to make money.
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Re: Buffett gains ground in hedge fund bet

Postby dad2000 » Thu Mar 22, 2012 6:23 pm

Despite the fact that this bet isn't fair (ie real-world), Buffett will still win hands down. I see at least 2 factors of unfairness:

1. Taxes are probably not figured in to this bet. This would obviously favor Buffett.
2. From what I can tell, the hedge fund fees (typically 2+20%) are accounted for in the bet. But these guys operate a fund of funds, and would normally charge 1+10% to pick the 5 funds. I don't think this is accounted for.

If we take YTD and both factors above into account, Buffett would already be winning. Unless the hedge funds could significantly outperform the S&P for the duration, they'd stand no chance.
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Re: Buffett gains ground in hedge fund bet

Postby avmax8 » Thu Mar 22, 2012 8:02 pm

abuss368 wrote:I understand "The Snowball" was not written by Mr. Buffett as I have a copy of the book. However, he allowed unprecedented access to write the book. I understand the reviews were very good. Has anyone read it?


I have. Really enjoyed it and found it actually pretty objective.
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Re: Buffett gains ground in hedge fund bet

Postby lethean46 » Fri Mar 23, 2012 11:47 am

[quote="avmax8"][quote="abuss368"]I understand "The Snowball" was not written by Mr. Buffett as I have a copy of the book. However, he allowed unprecedented access to write the book. I understand the reviews were very good. Has anyone read it?[/quote]

I have. Really enjoyed it and found it actually pretty objective.[/quote]

I read the book when it first came out. In my opinion, it was poor. I was hoping for a really great book on Buffett since Alice was an analyst at Morgan Stanley, she covered BRK, and she was invited by Buffett to write his biography. She contributed very little additional information or understanding of Buffett/BRK to that which had already been published by others. And, the little she did add? was of the tabloid variety re Buffett's personal life. She was chosen to write the book because she was a good financial analyst. So in that regard, the book was a big miss.

In the years since publication of the book, she has almost completely discredited herself among Berkshireshire shareholders. Buffett has had no comment on the book, at all. Silence.

I much preferred The Making of an American Capitalist by Roger Lowenstein, The Essays of Warren Buffett by Cunningham, and Of Permanent Value by Andy Kilpatrick.

I preordered 4 copies of The Snowball intending to gift 3 of those copies to particular individuals. I still have them and am unsure what to do with them. I won't give them to those individuals, for sure. I could give them to the local resale book shop or a library? But, given my high opinion of Buffett and my poor opinion of the book? I probably won't do that either. Next option? is to just put them in the trash. Ugh.

FWIW ....
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Re: Buffett gains ground in hedge fund bet

Postby portney » Thu Feb 06, 2014 6:09 am

Just thought I'd bump this story. Ran across it this morning, and fwiw, I doubt many here will find it very surprising:

http://www.cnbc.com/id/101394085?__sour ... d%20in%20b
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Re: Buffett gains ground in hedge fund bet

Postby smpatel » Thu Feb 06, 2014 7:54 am

Original article - This is so amusing- Hedge funds comment is sobering-

"We've got our work cut out for us," said Protégé's Seides


http://features.blogs.fortune.cnn.com/2 ... llion-bet/
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Re: Buffett gains ground in hedge fund bet

Postby investingdad » Thu Feb 06, 2014 8:39 am

Get ready for the arguments to start when it's over that, "Sure, but if you sold the hedge funds during periods of gain and then bought the Index fund when it was down, you would have managed yourself into a gain that beat both."

Or something to that affect.

I've been chugging along for close to 20 years now, it's all good.
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Re: Buffett gains ground in hedge fund bet

Postby Rodc » Thu Feb 06, 2014 10:22 am

I'm rooting for Warren, but given the volatility in both investments this is well into "counting your chickens before they hatch" territory.
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Re: Buffett gains ground in hedge fund bet

Postby tigerman3 » Thu Feb 06, 2014 10:22 pm

Rodc, It is not a matter of "before" they hatch; but rather a matter of when they hatch.

dad2000, I'm sure tax effect isn't included. Another point for Buffett.
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Re: Buffett gains ground in hedge fund bet

Postby JoMoney » Fri Feb 07, 2014 8:29 am

investingdad wrote:Get ready for the arguments to start when it's over that, "Sure, but if you sold the hedge funds during periods of gain and then bought the Index fund when it was down, you would have managed yourself into a gain that beat both."

Or something to that affect.

I've been chugging along for close to 20 years now, it's all good.

I'm sure there will be lots of arguments regardless of what the outcome is, but the index fund wasn't exactly "down" (at least not much) when the bet began 1-Jan-2008.
Closing price for the S&P500 on Dec 31, 2007 was $1,468.36 which was only around 7% off of the high that was reached in Oct. that year ($1,576.09). In a lot of ways, the hedge fund (being able to short the market) should have had a huge advantage with the tremendous downturn that really didn't get started until mid to late 2008.
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