The Great Hedge Fund Humiliation: Buffett's Bet That Made Wall Street Sweat (and Lose)

Our story begins with the legendary Warren Buffett, a guy who knows a thing or two about making money. He wanders onto Long Bet (Jeff Bezos's playground for intellectual wagers) and drops a challenge so bold, it's like throwing down a gauntlet made of solid gold. 'I bet,' he says, 'that over 10 years, a simple S&P 500 index fund will crush the fancy-pants hedge funds.'

Silence. Crickets. Tumbleweeds. Then, from the shadows, emerges Ted Seides of Protege Partners, a brave (or perhaps just very, very confident) soul. He's like, 'Bring it on, Buffett! My hedge funds are basically financial superheroes!'

Now, here's where it gets interesting. Buffett wanted to compare the S&P 500 to the average of at least five hedge funds. Protege Partners, in their infinite wisdom, chose five funds of funds. That's right, folks, we're talking about a hedge fund inception situation, with over 200 individual hedge funds in the mix. They argued, 'Through a cycle, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well.'

'A cycle,' huh? That's Wall Street speak for 'whenever we feel like it.' And 'top managers'? That's code for 'the guys who haven't been caught setting their clients' money on fire yet.'

Fast forward 10 years, and the results are in. Drumroll, please…

• Best-performing hedge fund: 87.7% return.
• Worst-performing hedge fund: A truly pathetic 2.8% return.
• S&P 500 index fund: A glorious 125.8% return.

Ouch. It's like watching a team of highly paid squirrels try to outrun a cheetah.

Buffett, in his 2017 Berkshire Hathaway shareholder letter, basically did a mic drop, and then probably went out for a nice steak.

The moral of the story?

Sometimes, the simplest things are the best. And sometimes, hedge fund managers are really good at charging fees, but not so good at, you know, making money.

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