Warren Buffett Makes Million Dollar Bet

[wowrevolution]

http://longbets.org/362/

“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” Detailed Terms »

PREDICTOR
Warren Buffett

CHALLENGER
Protege Partners, LLC
STAKES $1,000,000

will go to Girls Incorporated of Omaha if Buffett wins,
or Friends of Absolute Return for Kids, Inc if Protege Partners, LLC wins.

 

[hazek]

That's like me making a $100 bet.. namely irrelevant.

 

[Zippyjuan]

Yes, $1 million is not that much to a billlionare. Buffet does make some excellent points in his side of the arguments on the issue:

Buffett's Argument


A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

The other side is betting that hedge funds can beat the average index fund despite those higher fees.

Some will be able to achieve better than average returns but those will be offset by others suffering below average returns- hence how the "average" is achieved. If the average investor gets average returns, then costs become the primary factor in deciding if you are above it or below it in the long term.

 

[swissaustrian]

I would take that bet aswell, because the so called "hedge funds" are nothing but leveraged conventional stock funds.
The only real hedge funds, meaning market neutral returns, outperformance of stocks at lower volatility are managed futures funds (CTAs) = systematicly traded futures. They only need trends, that´s all. All the other "hedge" fund strategies (arbitrage, global macro, relative value etc.) are failing to deliver insurance.
For an explanation of managed futures, see here: http://www.investopedia.com/articles/optioninvestor/05/070605.asp#axzz1bLkIZmP1
Plus this chart from wikipedia:

As you can see, they´re performing best during stock market crashes.