Protégé Partners has likely found itself on the losing
end of a $1 million bet with Berkshire Hathaway chairman Warren Buffett after a
group of hedge funds it selected failed to beat a Vanguard Group index fund for
almost a decade.
The outcome of the wager,
which concludes at the end of this year, is the latest reminder of the momentum
that low-cost passive investing has gained since the financial crisis.
Investors have increasingly favored index funds, which track benchmarks, over
paying higher fees to money managers who make active picks in the stock and bond
markets.
Buffett, a billionaire investor and outspoken critic of
fund managers who profit from high fees at the expense of their clients, bet in
2007 that a Vanguard S&P 500 index fund would beat five funds of hedge
funds selected by Protégé Partners over the next 10 years. Buffett laid out
evidence in his 2017 annual letter to
Berkshire Hathaway shareholders that he’s set to win the wager as none of the
funds outperformed the index fund from 2008 through 2016.
Jeffrey Tarrant, founder and CEO of Protégé
Partners, an asset manager based in New York, didn’t immediately return a
phone call seeking comment.
The $3 trillion hedge fund industry, which has been
struggling to outperform stock and bond markets, could see assets
shrink by as much as 30 percent in the next three years if performance
continues to disappoint, according to a report this month from Boston
Consulting Group. By contrast, Vanguard, whose name is synonymous with index
funds, attracted
more money from investors in 2016 than all mutual funds and exchange-traded
funds combined, preliminary data from Morningstar earlier this month showed.
“Though there are thousands of professional investment
managers who have amassed staggering fortunes by touting their stock-selecting
prowess, only one man — Ted Seides — stepped up to my challenge,” Buffet said
in his letter, signed Feb. 25. So If you also want to have an edge on Investing you could also use a Percentage Calculator.
Seides was then co-manager of Protégé Partners, a
fund-of-funds firm that focuses on emerging hedge fund managers. The Oracle of
Omaha said in his letter that the five funds Seides selected had invested their
money in more than 100 hedge funds, which meant the results wouldn’t be
“distorted” by the performance of a single manager.
“I hadn’t known Ted before our wager, but I like him and
admire his willingness to put his money where his mouth was,” Buffett said. “He
has been both straight-forward with me and meticulous in supplying all the data
that both he and I have needed to monitor the bet.”
Seides,
who left Protégé in 2015 and is now a managing partner at Hidden Brook
Investments, said in an email that he couldn’t comment on the bet because
technically it belongs to Protégé.
According to Buffett, the five funds-of-funds gained 2.2 percent on an
compounded annual basis in the nine years through 2016. “That means $1 million
invested in those funds would have gained $220,000,” he said. “The index fund
would meanwhile have gained $854,000.”
Under terms of the wager, the winnings will go to a
charity. Buffet said the performance of the funds of hedge funds leaves “no
doubt that Girls Inc. of Omaha, the charitable beneficiary I designated to get
any bet winnings I earned, will be the organization eagerly opening the mail
next January.”
