The Hedge Fund Trap


I love reading about Warren Buffet’s ten year bet against hedge funds. He posted the challenge on Long Bet here (The Long Bet site was founded by Jeff Bezos). What’s interesting was that Buffett was initially met with silence and then only one man – Ted Seides of Protege Partners – stepped up to the challenge.

Buffett stipulated that the average of at least five hedge funds must be compared to the return of the S&P 500 index net of fees over a ten year period. In actual fact Protege Partners selected five funds of funds, so the total number of hedge funds in the running was more than 200. This would mean that  overall performance would not be distorted by the good or poor results of a single manager.

This is part of Protege Partners argument on Long Bet:

“Through a cycle, nevertheless, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. ”

What a load of bullshit! Notice they don’t define how long a cycle is, nor how many hedge fund manager’s are considered ‘top’. While a small minority of hedge funds are bound to beat the average sometimes, what about all the others that just make hedge fund manager’s rich at the expense of their clients or worse silently get shut down for being absolute dogs?

The final result?

Total return for the best performing hedge fund of the five fund of funds was 87.7%

Total return for the worst performing hedge fund of the five fund of funds was 2.8%

Total return for the S&P 500 index tracker was 125.8%

You can read what Buffett has to say in his 2017 Berkshire Hathaway Shareholder letter

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