Carol Loomis of Fortune has just posted the 6-year update in Fortune of the $1,000,000 index fund vs. hedge fund bet between Warren Buffett and a successful hedge fund manager. The hedge funds were in the lead early on, but started lagging behind last year. Over 2013, the index fund lead widened further. 60% of the way through the 10-year bet (1/1/08 to 12/31/17), the Vanguard S&P 500 index fund backed by Buffett is up by 43.8%. The group of hedge funds hand-picked by Protégé Partners are up by 12.5%, a gap of over 30%.
Will this collection of hand-picked hedge funds be able to outperform a simple, low-cost index fund over the long run? Hedge funds employ the smartest minds but also charge hefty fees of roughly 2% of assets annually + 20% of any gains. At the start of the bet, the past performance of the hedge funds were excellent – from inception in July 2002 through the end of 2007, the Protégé fund gained 95% (after all fees), soundly beating the Vanguard S&P 500 index fund’s 64%. But lots of funds have good performance when looking backwards. It is much harder to pick out winning managers ahead of time (and harder on those managers when everyone is looking).
Read the story of how the bet came to be in the original 2008 Fortune article “Buffett’s Big Bet”. Read the terms of the bet and each side’s opening arguments at LongBets.org. This carefully-tracked bet was part of the inspiration for my transparent Beat the Market experiment. Too often, people are not honestly and accurately tracking the performance of their portfolios… again, starting ahead of time. It is natural to point out your winners and conveniently forget the losers.
You can read my original 2008 blog post and halfway 5-year update here.