Buffett’s bets: how dumb are hedge fund managers?

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ralphjones
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Buffett’s bets: how dumb are hedge fund managers?

Post by ralphjones »

Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Vanguard Fan 1367 »

I appreciate the wisdom of John Bogle and Bogleheads. Unfortunately the thought that you need to pay someone a load and at least a 1 percent annual fee on a mutual fund is pretty common. Also lots of people think that you can achieve some magic with hedge funds. I appreciate the magic of Vanguard and other no load low expense ratio index funds.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Theoretical »

ralphjones wrote:Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
It's even worse than that, amazingly. There's a bit of announcement vs. implementation delay. All the funds had to do was front-run the S&P 500 by making the trades immediately rather than when the indexers actually buy.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by sandramjet »

Or, perhaps the question is "how cocky are the fund managers?" because I'm sure they thought they would continue to trounce the index.

I'm not sure what the exact terms of the bet were. For example, did it include the effect of fees? Because they would have had to earn more than the S&P to make up for their fees. Were they allowed to change their methods like that?

But in any case, I'm glad they did what they did!
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Vanguard Fan 1367 »

sandramjet wrote:Or, perhaps the question is "how cocky are the fund managers?" because I'm sure they thought they would continue to trounce the index.

I'm not sure what the exact terms of the bet were. For example, did it include the effect of fees? Because they would have had to earn more than the S&P to make up for their fees. Were they allowed to change their methods like that?

But in any case, I'm glad they did what they did!

I am pretty sure that you would have to include the fees. That is Bogle's theme song and I am pretty sure that Buffet admires Bogle for his innovations in Mutual Fund low fees.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Earl Lemongrab »

While a million seems like a lot, at their level it's more like you and I betting a dollar. Changing the fund to follow the S&P would likely lead to massive outflows. After all, who would pay hedge fund prices for an index fund?
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Texanbybirth »

Vanguard Fan 1367 wrote:I appreciate the wisdom of John Bogle and Bogleheads. Unfortunately the thought that you need to pay someone a load and at least a 1 percent annual fee on a mutual fund is pretty common. Also lots of people think that you can achieve some magic with hedge funds. I appreciate the magic of Vanguard and other no load low expense ratio index funds.
Well said.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Nick341981 »

I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Abe »

sandramjet wrote: I'm not sure what the exact terms of the bet were. For example, did it include the effect of fees? Because they would have had to earn more than the S&P to make up for their fees. Were they allowed to change their methods like that?
The returns are after fees.
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Will do good
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Will do good »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Beliavsky »

ralphjones wrote:Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
The criticism of hedge funds on this board is often dumb. Obviously, hedge fund managers do not run their portfolios to win a bet with Warren Buffett. Just as obviously, their clients do not pay them to simply invest in the S&P.
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How dumb are hedge fund managers?

Post by David Jay »

They are not dumb at all. They received 60% of all gains in their funds.

now investors, on the other hand...
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by KyleAAA »

I'm fairly certain the terms of the bet required them to invest in hedge funds so simply moving to the S&P 500 wasn't an option. But even if it was, that would completely defeat the point of the bet.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by jayhawkerbeef »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
True, but depends on time frame. Referring to analysis by Paul Merriman, diversification is key long-term... http://paulmerriman.com/ultimate-buy-hold-tables-2016/
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by chocolatemuffin »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
I wonder whether Warren Buffet would still win if he invests in international, emerging, and bonds and well. I think the S&P has outperformed almost everything else over the betting period.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by nisiprius »

A point that should perhaps be made. Buffett did not bet against a normal hedge fund. He bet against a firm named Protégé Partners which operates "funds" (I don't know why they don't call them "hedge funds") that describes itself this way:
Protégé Partners is a specialized asset management and advisory firm that was founded in 2002 to focus exclusively on investing in established smaller hedge funds and select emerging managers. Through tenured judgment, deep-dive due diligence and pro-active risk management, we strive to identify best-in-class managers and put capital to work through arms-length, seed and tactical investments.
So it is a double layer active bet. First, the "smaller hedge funds" invest actively, more actively than mutual funds are allowed to invest, basically with no constraints--anything they want, leverage and all, and since they are smaller they are not even constrained by what Protégé calls the "limited opportunity set" available to larger funds. Then, on top of that, Protégé can do better than the average hedge fund, they say, because they know how to pick and choose only the better ones.

With a double layer of fees.

According to the participants in the bet, themselves,
Warren Buffett wrote:Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.
Protégé Partners did not deny it, so I think they acknowledged it; they said it wasn't a problem:
Protégé Partners wrote:Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay.
Protégé seems to suggest they negotiate lower fees with the hedge funds, so it's probably not as bad as a double layer of 20% fees. The math on a double layer of 20% fees means that, if you assume, say, 10% annual CAGR for the S&P 500, the index fund has a 4.7-year head start on the hedge fund!
Last edited by nisiprius on Wed Mar 08, 2017 9:20 pm, edited 2 times in total.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by solar99999 »

ralphjones wrote:Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
I have worked very closely with numerous hedge fund investors and I have to say that they are not as dumb as you think. In fact, most believe that investing in a hedge fund adds a layer of diversification. It's the same reason why people invest in long term bonds today (something that Buffett does not view as a smart choice) or preserve a balance in cash (which could lose purchasing power due to inflation.

I have not personally seen any investor that has gone all in on hedge funds.

The more you diversify, the more you play not to lose.

I personally believe that too much diversification is a bad thing and I would instantly drop all fund to funds from my portfolio but that's too much of a tangent to discuss here.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by EyeYield »

Funds of funds with the ability to sort the wheat from the chaff.
Should read "Funds of funds with the ability to sort the fees from the investor."

A better thread title might be, "How rich are hedge fund managers?"
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Re: How dumb are hedge fund managers?

Post by alfaspider »

David Jay wrote:They are not dumb at all. They received 60% of all gains in their funds.

now investors, on the other hand...
This. The bet with Warren is hardly a material sum for them. Besides, the bet had to be returns after fees (i.e. with a hypothetical investment of a given amount- who has the most at the end of 10 years). With the hedgies fees, turning into an overpriced index fund wouldn't have necessary given them the win.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by betablocker »

The discussion of "hedge funds" is very misleading. Almost any investment vehicle with a performance fee is called a hedge fund at this point. A long only manager like Seth Klarman is called a hedge fund as well as funds that actually do hedge. Cliff Asness has said that the problem with a lot of hedge funds is that they don't hedge. It's a meaningless term now. But we shouldn't let the term blind us to the merits of many of the strategies. Look at the Larry Portfolio. It's essential a risk parity or factor balancing strategy just like many hedge funds use (i.e. Ray Dalio). Granted he's not going long/short, etc. The problem with hedge funds is a lack of a precise definition and a bad fee structure. Groups like AQR that are taking the best strategies and commodifying them are doing great work.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Pajamas »

Those managers are very smart because they made huge salaries and received excellent benefits even though they underperformed the indexes.

It is their investors who are dumb.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by rattlenap »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
He made the bet around the time during the crash of 2008-2009 when the S&P was bottoming out. Kind of ironic the timing of it don't you think.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by unclescrooge »

Vanguard Fan 1367 wrote:I appreciate the wisdom of John Bogle and Bogleheads. Unfortunately the thought that you need to pay someone a load and at least a 1 percent annual fee on a mutual fund is pretty common. Also lots of people think that you can achieve some magic with hedge funds. I appreciate the magic of Vanguard and other no load low expense ratio index funds.
The same magic they expect of WLI!
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Nick341981 »

rattlenap wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
He made the bet around the time during the crash of 2008-2009 when the S&P was bottoming out. Kind of ironic the timing of it don't you think.
The bet started in 2007 and then the crash hit so he obviously started at a major disadvantage which still says a lot about the fact that he did it with nothing but an S&P 500 index fund and no diversification(as far as international, emerging, bonds, etc) which he has come out strongly against many times yet many bogleheads choose to argue against. Maybe this old guy knows a thing or two after all? ;)
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by WildBill »

A better title for the thread is : how dumb are hedge fund customers?

Since the managers made a lot of money irrespective of returns I think they are pretty smart.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by avalpert »

Beliavsky wrote:
ralphjones wrote:Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
The criticism of hedge funds on this board is often dumb. Obviously, hedge fund managers do not run their portfolios to win a bet with Warren Buffet. Just as obviously, their clients do not pay them to simply invest in the S&P.
Apparently the defense of hedge funds on this board is also dumb. Sure, hedge fund manager do not run their portfolio to win bets with Buffet. Just as obviously, their client do not pay them to underperform the S&P - if they pay them to do something different for the sake of being different then they are morons, of they pay them to be better stewards of their money they are failures. Take your pick, morons or failures?
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Kenkat »

They are not dumb; they are just too expensive. There is a difference.
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Re: How dumb are hedge fund managers?

Post by baw703916 »

David Jay wrote:They are not dumb at all. They received 60% of all gains in their funds.

now investors, on the other hand...
That's why I always found the title of the book Hedge Funds for Dummies hilarious. Aren't all hedge funds intended for (rich) dummies, given the 2 and 20 fee structure?
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by wolf359 »

The bet wasn't with the individual hedge fund managers. It was with one specific manager who diversified his bet using the best hedge funds he knew.

In addition, the beneficiary of the bet was a charity. The hedge funds don't have a direct stake in the outcome of the bet. They're not even specifically identified.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by lack_ey »

avalpert wrote:
Beliavsky wrote:
ralphjones wrote:Warren Buffett has just announced himself the winner (albeit it only nine years in) of a ten-year bet : himself (aka S&P index fund) versus the hedge fund industry.

What has gone unremarked is that he should have lost. At the end of year 1 he was toast. Game over. Because 2008 was a terrible year for the S&P ( -37%) turning a nominal $1,000,000 into $630 000.

By then he was trailing every single one of the five fund of funds (don't ask) in the competition. Even the worst finished the year at around $700,000, the best still had $835,000.

They averaged $760 000, $130 000 ahead of Buffett, going into 2009.

It meant that from 2009 onwards the S&P had to outperform the hedge funds by 20% just to get even.

A priceless bit of PR was within their grasp - beating Warren Buffett. Because they could have made sure he would never catch them.
Buffett's tactics were known. He had nailed his colours firmly to the S&P index mast, and all they had to do was follow suit and switch their money into the index and wait for their $1million bet to come good.

But they didn’t. And they lost, Badly. Buffett ended $630,000 ahead.
Except that personally they may have done OK with other peoples money through their fee structure.
Here’s Buffett:
'Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. ‘

So if they did OK, maybe the original question should be rephrased:
‘How dumb are hedge fund investors?’
The criticism of hedge funds on this board is often dumb. Obviously, hedge fund managers do not run their portfolios to win a bet with Warren Buffet. Just as obviously, their clients do not pay them to simply invest in the S&P.
Apparently the defense of hedge funds on this board is also dumb. Sure, hedge fund manager do not run their portfolio to win bets with Buffet. Just as obviously, their client do not pay them to underperform the S&P - if they pay them to do something different for the sake of being different then they are morons, of they pay them to be better stewards of their money they are failures. Take your pick, morons or failures?
How about people who pay to get something different and positive relative to cheap, passive exposures available elsewhere? Not necessarily positive relative to an all-equity benchmark, though that would be a reasonable goal for an active-mutual-fund-style hedge fund that's mostly just long US stocks, but positive relative to what can be replicated by cheaper means.

Now, whether you can pick something with those characteristics a priori is a different matter. Picking randomly doesn't get you there, given all the fees and the average performance seen. The costs are so high that you'd really need a lot of actually well-founded confidence, which I wouldn't have.

For all we know, the hedge funds selected could be outperforming reasonable benchmarks and adding after-fee alpha, potentially even improving the portfolios of some investors. Now, the 24% loss in 2008 seems to indicate likely significant market beta so very likely not, and we don't really know the vol here or what's going on under the hood (all indications aren't so encouraging), but we don't know for sure.

Now, the guy at Protege who agreed to the bet, on the other hand, explicitly pitted those funds against the S&P 500, believing for whatever reasons the after-fee performance likely to be sufficiently good.

Also with respect to the realized outcomes, which over any ten years are going to be pretty random, the S&P 500 so far as done pretty well, posting something like 5.9% real despite decently high starting valuations in 2008 (CAPE of 24). That's better of a result than the base case I would think, owing in part of the valuation expansion recently.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by nisiprius »

Couple of other thoughts. It should be noted that Buffett himself and most of us (including me) are counting Buffett's chickens before they have hatched. None of us should probably be doing that.

The second thought is that, just as with hedge funds and actively managed funds themselves, the risk is pretty asymmetrical. With regard to money, the fund managers are rewarded no matter what happens.

With regard to publicity and reputation, the risk is still asymmetrical. The managers win big if their risk pays off and don't seem to lose much if it doesn't. In this case, even losing the bet, the results for Protégé Partners are probably pretty good. How many of us would have ever heard of them if it weren't for the bet? As long as the outcome was in doubt, their clients probably admired them for taking on Buffett and putting some money where their mouth was. And when it's over, since just about everyone agrees that ten years doesn't really mean much, I doubt if they will lose too many clients over it. Some clients will even accept their excuses, their explanations of how unusual this particular ten years was.

I'm not abandoning Total Stock just because it was outperformed by Fidelity Contrafund over the last ten years. The people who pursue value strategies and tilts in this forum are mostly unfazed by the absence of the value premium for the last ten years. I think the bet is pretty much upside for Protégé, win or lose.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by VaR »

A hedge fund manager's job is to produce positive absolute return uncorrelated with market beta. I'm with the posters above who say that it is irrelevant whether they outperform the S&P 500. Their performance isn't benchmarked against the S&P 500. The main question is whether they can increase the Sharpe Ratio of a portfolio of stocks, bonds and possibly other alternative investments like real-estate and commodities.

Regarding the bettors: I'm not with the posters in other threads who think the S&P 500 is reaching "bubble" status again, but I do think it is a bit of bad luck that 10 years after making a bet against a "clear" equity bubble, the hedgies lost the bet because the market crashed but quickly ran up again to "bubble" status and beyond. :)
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sometimesinvestor
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by sometimesinvestor »

Sorry but most of the comments in this thread with the exception of Nispirus and Wolf are wrong or just irrelevant. THe bet was on whether Buffets opponent could pick at least 5 hedge funds (I believe 5 was the number picked) and outperform the index My guess is that the hedge fund managers were aware of the bet but certainly had no stake in it. Actually I think 5 funds of funds (each a collection of several hedge funds like STAR is a collection of mutual funds ) was what was picked . Its not like the Carl Icahn or Bill Ackman fund was picked though the funds of one or both might have been part of one of the fund of Funds
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by steve roy »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
That's why Warren is The Man.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Nick341981 »

VaR wrote:A hedge fund manager's job is to produce positive absolute return uncorrelated with market beta. I'm with the posters above who say that it is irrelevant whether they outperform the S&P 500. Their performance isn't benchmarked against the S&P 500. The main question is whether they can increase the Sharpe Ratio of a portfolio of stocks, bonds and possibly other alternative investments like real-estate and commodities.
Anybody who buys this excuse deserves to lose a ton of money to a low fee S&P500 index.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by TomatoTomahto »

Dumb might be the wrong characterization. My son interviewed at tech firms (Google, Facebook, Microsoft, and some niche firms) and at hedge funds. The grilling at hedge funds was much much tougher.
I get the FI part but not the RE part of FIRE.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by stemikger »

Here's what John Bogle says about Hedge fund-of-funds in the Little Book of Common Sense Investing. No!! Really, no. If a regular hedge fund is too expensive, just imagine a fund of hedge funds that lays on another whole layer of expenses.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by stemikger »

Will do good wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
I guess Jack was on to something when he says all you need are two funds, the Total Stock Market Index and the Total Bond Market Index. And if that is too much for you, just invest in one fund. The Vanguard Balanced Index Fund.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by nedsaid »

I don't think that hedge fund managers are dumb, it is just that markets do unexpected things at precisely the wrong time. Markets always seem to find the chink in the armor.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by corysold »

Why is everyone assuming the bet is actually over?

Wouldn't it be possible to have a 40% drop in the S&P over the next year, counted against some good bets by the hedge fund managers in particular sectors that do well, or well placed shorts against sectors that do poorly?

I know it is likely that Buffet will win, but declaring a winner with 10% of the bet left seems a bit odd.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Vanguard Fan 1367 »

corysold wrote:Why is everyone assuming the bet is actually over?

Wouldn't it be possible to have a 40% drop in the S&P over the next year, counted against some good bets by the hedge fund managers in particular sectors that do well, or well placed shorts against sectors that do poorly?

I know it is likely that Buffet will win, but declaring a winner with 10% of the bet left seems a bit odd.

Good point: Yogi said, "it ain't over till its over".
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by VaR »

Nick341981 wrote:
VaR wrote:A hedge fund manager's job is to produce positive absolute return uncorrelated with market beta. I'm with the posters above who say that it is irrelevant whether they outperform the S&P 500. Their performance isn't benchmarked against the S&P 500. The main question is whether they can increase the Sharpe Ratio of a portfolio of stocks, bonds and possibly other alternative investments like real-estate and commodities.
Anybody who buys this excuse deserves to lose a ton of money to a low fee S&P500 index.
It's not an excuse. I wouldn't recommend that anyone invest any of their money in a hedge fund - and certainly not a 20/2 one. I don't. VTSAX is my recommendation.

I am saying that on the face of it, the bet might be somewhat stupid. It's like betting that VBTLX (total bond) will outperform the S&P 500 or that gold will outperform the S&P 500 or that residential real estate will outperform the S&P 500. Winning those bets doesn't say anything about whether the managers of VBTLX are dumb.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Roguejim »

stemikger wrote:
Will do good wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
I guess Jack was on to something when he says all you need are two funds, the Total Stock Market Index and the Total Bond Market Index. And if that is too much for you, just invest in one fund. The Vanguard Balanced Index Fund.
When Jack said that, was that pretty much of a blanket statement for all investors, regardless of their age, proximity to retirement?
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Nick341981 »

Roguejim wrote:
stemikger wrote:
Will do good wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
I guess Jack was on to something when he says all you need are two funds, the Total Stock Market Index and the Total Bond Market Index. And if that is too much for you, just invest in one fund. The Vanguard Balanced Index Fund.
When Jack said that, was that pretty much of a blanket statement for all investors, regardless of their age, proximity to retirement?
Yes, according to Jack all you need for diversity is U.S. and bonds adjust the bonds according to your risk tolerance and age. No need for international, emerging, precious metals, or any other sector or strange way you can think up to diversify. Warren Buffett says the exact same thing only he is much less a fan of bonds.

"Own American business and hold them forever at the lowest cost you can possibly hold at. It's an extraordinarily simple strategy and the mathematics are enduring." Jack Bogle http://money.cnn.com/2017/03/08/investi ... index.html

I'm still amazed at the number of people here that ignore his AND Warren's advice.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Roguejim »

Nick341981 wrote:
Roguejim wrote:
stemikger wrote:
Will do good wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
I guess Jack was on to something when he says all you need are two funds, the Total Stock Market Index and the Total Bond Market Index. And if that is too much for you, just invest in one fund. The Vanguard Balanced Index Fund.
When Jack said that, was that pretty much of a blanket statement for all investors, regardless of their age, proximity to retirement?
Yes, according to Jack all you need for diversity is U.S. and bonds adjust the bonds according to your risk tolerance and age. No need for international, emerging, precious metals, or any other sector or strange way you can think up to diversify. Warren Buffett says the exact same thing only he is much less a fan of bonds.

"Own American business and hold them forever at the lowest cost you can possibly hold at. It's an extraordinarily simple strategy and the mathematics are enduring." Jack Bogle http://money.cnn.com/2017/03/08/investi ... index.html

I'm still amazed at the number of people here that ignore his AND Warren's advice.
Okay then. Since I'm in the TSP plan, I would allocate to the C, and F funds? Or, would the S fund also be included?
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by baw703916 »

So I did a quick calculation. Say the hedge funds had decided to coast after jumping out to a big lead, and just tracked the S&P 500 for 2009-2016 (but imposed a 2 and 20 fee structure).

They still would be trailing today, just because of the cumulative fees.
Most of my posts assume no behavioral errors.
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by stemikger »

Posted by Rogue Jim

When Jack said that, was that pretty much of a blanket statement for all investors, regardless of their age, proximity to retirement?
Jack has said it quite often. He does throw in when you are younger - you should hold more in stocks and when you are older, use the very crude rule of thumb - age in bonds or a variation thereof.

Jack's Grandchildren are young, but he still puts money for them in the Vanguard Balanced Index Fund because he does not want them to worry and he doesn't want to worry about it either.

Below is just one instance Jack talks about it below:

https://www.youtube.com/watch?v=6Qg959oYCxU&t=885s

Here he talks about not needing or wanting international:

https://www.youtube.com/watch?v=hvgptl5-Kcc

Here John Bogle talks about the money he leaves for his Grandchildren:

https://www.youtube.com/watch?v=y_tHhGtX-lA
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Phineas J. Whoopee »

Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
Will do good wrote:
Nick341981 wrote: I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
chocolatemuffin wrote:...
I wonder whether Warren Buffet would still win if he invests in international, emerging, and bonds and well. I think the S&P has outperformed almost everything else over the betting period.
Hi Nick341981, Will do good, and chocolatemuffin,

The Bogleheads investment philosophy and portfolio recommendations are not based on seeking the highest possible return over short periods like a single decade without regard to how much risk the investor takes. They're certainly not based on seeking the highest possible return over periods that exceed a human lifetime or two or three.

They're meant for individual investors who are mortal, perhaps taking into account heirs who are also mortal.

If your objective is maximum possible return over a short period like a decade without regard to risk taken in order to achieve it, but in the unknown future rather than looking at what already happened in the past, then Bogleheads-style investing is probably not for you.

But maybe you were being sarcastic. :happy

PJW
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Nick341981 »

Phineas J. Whoopee wrote:
Nick341981 wrote:I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
Will do good wrote:
Nick341981 wrote: I'm amazed Warren could pull off such an impressive feat without a well diversified portfolio of international, emerging markets, bonds, etc. Just a simple S&P 500 index fund. :mrgreen:
+1
chocolatemuffin wrote:...
I wonder whether Warren Buffet would still win if he invests in international, emerging, and bonds and well. I think the S&P has outperformed almost everything else over the betting period.
Hi Nick341981, Will do good, and chocolatemuffin,

The Bogleheads investment philosophy and portfolio recommendations are not based on seeking the highest possible return over short periods like a single decade without regard to how much risk the investor takes. They're certainly not based on seeking the highest possible return over periods that exceed a human lifetime or two or three.

They're meant for individual investors who are mortal, perhaps taking into account heirs who are also mortal.

If your objective is maximum possible return over a short period like a decade without regard to risk taken in order to achieve it, but in the unknown future rather than looking at what already happened in the past, then Bogleheads-style investing is probably not for you.

But maybe you were being sarcastic. :happy

PJW
I agree, the only question now would be what should we call people who choose to follow the advice of Jack Bogle and Warren Buffett as far as being U.S. Index investors and bond indexs allocated appropriately of course? Buffettheads perhaps? :D
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Re: Buffett’s bets: how dumb are hedge fund managers?

Post by Phineas J. Whoopee »

Nick341981 wrote:...
I agree, the only question now would be what should we call people who choose to follow the advice of Jack Bogle and Warren Buffett as far as being U.S. Index investors and bond indexs allocated appropriately of course? Buffettheads perhaps? :D
The authority is not the reasoning.

PJW
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