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7:16 pm - Friday December 9, 2016

Buffet Bets $320,000 Long on the S&P and against the Hedge Fund Industry

| Investing | Rating: 4.5
by Numan

Fortune magazine published yesterday that “The celebrated investor wagers a tidy sum that even carefully chosen hedge funds won’t return more than the market over time”

It looks like an old fashioned show-down. Will the market outperform even a carefully selected collection of hedge funds? Warren Buffet and Protégé Partners LLC, a New York City money management firm took sides in this $320,000 bet of which profits will go to charity.

I myself have written here on the benefits of investing in an index. Among these advantages are:
1. The fact little or few money managers actually beat the market in the long run
2. Low transaction costs, commissions and fees
3. Increased diversification
4. Less hassle

It seems the great oracle from Omaha, Warren Buffet himself, has agreed to risk a tidy sum in favor of index investing.

The biggest challenge facing Protégé in this bet is the enormous fees hedge fund managers charge. These fees are comprised of a management fee, usually 1%-2.5%, and also an overwhelming share in gains of 20%.

This bet holds a very important truth for us household investors. The mere fact this bet exists suggests index investing is probably one of the more recommended ways for long term investing. True, Warren Buffet made his fortune stock picking and analyzing but that’s beyond most people’s reach. Certainly beyond most household’s ability.

One more interesting fact noted in the article is that Warren Buffet offered this bet as early as May 2006 in Berkshire’s annual meeting. The fact no one has taken him up on his offer up until now probably makes him more right than wrong.

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