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

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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 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.

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  1. Yeah… so you are comparing a time that started right after the value of most indexes was cut in half and the market began one of its largest rises (recoveries) in modern history, to a time when hedgefunds just ended a similar period of large gains. Not exactly a good period for comparison…

    • This was a voluntary bet on both sides made as of January 2008. Why makes excuses now based on what you know now happened because it is now 2014? I don’t think the participants are.

    • Funny argument by Glocklt4. Not only did index funds crash in 2008, almost all stocks did. The hedge fund operators were all over the press saying they were so much smarter they could do so much better than your mutual fund, whatever it was, so send money to them. As it has turned out, they weren’t any smarter than the market. Deducting their high fees they delivered lower returns. Will there ever be a time when some hedge funds do better than inde funds? Probably, but that will only show how random their winnings are. This was a time when they, if they had ant greater insight, had the best chance to prove it. They didn’t and deducting fees over the long term may never.

  2. I think this is a cute demonstration t to show what most of know… that paying high fees for “experts” is never worth it in the long run.

    By the way, S&P 500 was only about 10% off the historical high at that time, which happened just a few months before Jan 2008. I would actually argue that the difference would be more in favor of the index fund if they have chosen another period. I also would be curious to see if there is any ten-year period when the hedge funds as a whole outperformed index funds…

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