Four years ago, Warren Buffett made a bet with the managers of a hedge fund that a simple investment in the S&P 500 would outperform a fund of hedge funds over the ensuing ten years. This year, Buffett's side has nosed ahead. With Buffett's Vanguard 500 fund up 9 percent in the first two months of this year, the Buffett side is now up about 2.9 percent over the course of the bet.
That's after suffering huge losses up front, which the hedge funds were able to mitigate somewhat. In 2008, the first year of the bet, the fund of hedge funds lost 24 percent of its value - while Buffett's Vanguard fund was losing 37 percent. The S&P has tended to outperform the hedge funds since then, but what really harms the hedge fund side is the massive fees that its investors have had to pay. Hedge funds normally charge a 2 percent management fee and a 20 percent performance fee, while the fund of funds tacks on additional charges of 1.25 percent of assets and 7.5 percent of gains.
Buffett was banking on those fees being enough of a handicap to push his side of the bet over the top. The plan is that on December 31, 2017, the winner will get the loser to donate $1 million to the charity of his choice.
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