Index Funds vs. Hedge Funds: Buffett $1,000,000 Bet Update 2016


We are now 8 years in on the 10-year bet between Warren Buffett and a successful hedge fund manager. In 2007, Warren Buffett challenged any hedge fund to a long-term bet against the S&P 500. He found a taker.

Fortune magazine announced “Buffett’s Big Bet”, where $1,000,000 would go to the charity chosen by the winner. The bet would run from 2008 to 2018. Buffett would take the S&P 500, represented by the Vanguard S&P 500 index fund (Admiral shares). Protégé Partners would stand behind hedge funds, represented by the average return of five hand-picked hedge funds.

Carol Loomis has just posted the 2016 update in Fortune. The hedge funds made up a little bit of ground in 2015, but overall still lag significantly:

  • Last year (2015) the S&P 500 index fund went up 1.36%, but the hedge funds went up 1.7%.
  • Since inception (2008 through 2015), the S&P 500 index fund is up 66%. The hedge funds went up 22%. The performance gap is over 40%.

Here are the historical annual breakdowns:


An important aspect of this bet is that we are comparing performance after fees. Hedge funds may employ some bright minds but also charge hefty fees of roughly 2% of assets annually + 20% of any gains. That is like running into a heavy and persistent headwind. Meanwhile, the Admiral shares of the Vanguard 500 Index Fund charge only a flat 0.05% annually.

Another important lesson that it is easy to point on good performance in retrospect. It is MUCH harder to pick out winning managers ahead of time (and harder on those managers when everyone is looking and there is too much money to deploy). 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%.

Finally, my last point is that it is hard to know when to drop a winning strategy gone sour. The handpicked hedge funds have some serious catching up to do. But there are two years left in the bet, so technically it is still anyone’s game. If you were invested in these hedge funds, would you stick it out or cut your losses?

Read the full terms of the bet and each side’s opening arguments at See my original 2008 blog post and halfway 5-year update here.


  1. Nice affirmation for the index investor. These 5 “hand-picked” hedge funds are underperforming the index by a very large margin. Sure seems like gambling in this example. I wonder how much smaller the gap would be if the bet started before the crash…hedge funds are supposed to outperform the index during those times after all. The S&P 500 obviously took a beating, but if the index would have still outperformed these hedge funds, then that’s just dreadful on the hedge fund’s part.

    • Yeah, that’s what I’d be more interested to see as well. While I’m all about passive, low-cost, diversified investing with my own major assets, I feel like the index fund community might get a little carried away patting themselves on the back over this. As you suggest BF, my understanding of hedge funds is that a major purpose of theirs tends (unsurprisingly) to be “hedging” — i.e. risk mitigation strategies. People with absurd amounts of capital are often particularly concerned with preserving that capital, even at the cost of significantly lowering their probability of growing it as much over long time horizons. If hedge funds don’t generally outperform something like an S&P 500 index fund through the next major bear market, then it will be time to gloat/roll our eyes at those silly rich people paying high fees for worse performance. I feel like it might be somewhat coincidental (in favor of Buffet) that this particular bet happens to line up with a period of strong market growth. Again, I’m not saying that low-costs index funds won’t outperform high-cost actively-managed hedge funds over the long term in general (because I believe they will) — I’m just suggesting that the goals of hedge funds are often more nuanced than simple aggressive long-term growth.

    • @BF – Hedge funds provide diversification to investors portfolios. Even if a hedge fund underperforms the index, its addition to the portfolio may provide better risk adjusted return (lower return, with lower volatility of returns). The idea is to put 90% of your funds in major asset classes and remaining 10% into a hedge fund or other alternative assets that do not have a strong positive correlation with other assets in the portfolio. For the same reason people have bonds in their portfolios even though they offer lower returns as compared to stocks.

  2. It is my understanding that, if I put X dollars in an indexed mutual fund, the number of shares of stock I hold via the mutual fund will not change (after adjusting for splits) unless I put more money in or take money out.

    I know that the situation with a managed fund is different. If the market crashes, and I want to keep my head and stand pat, the fund manager will none the less have to sell shares of stock at depressed prices to cash out the fund-holders who want to get out.

    Can anyone add any insights to this?

    • simplesimon says:

      I don’t see a difference you describe between a hedge fund and an index fund – both have to maintain a level of liquidity and may sell to meet cash outflows.

  3. Haha – yet more proof that edge funds suck compares to long term buy and hold strategies using low cost ETFs that track different large market indexes.

  4. Markus Friedrich says:

    Just noting that this also fits well with Daniel Kahneman’s discussion of financial investor performance, which Jonathan summarized nicely in 2011 when “Thinking fast and slow” came out:

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