Indexing vs. Hedge Funds Buffett's Bet on Indexing Looks Good

It never ceases to amaze me how hope spings eternal about hedge fund success despite the evidence to the contrary.

Warren Buffet seems to know which side to be on in the debate from the FT

Warren Buffett versus the hedge funds

With three years to go, Warren Buffett is comfortably winning his charity bet that a low-cost index tracker would trounce a portfolio of hedge funds over ten years.

Returns from the S&P 500 index fund is beating a portfolio of funds assembled by hedge fund manager Protégé Partners by 63.5 per cent to 19.6 per cent, according to a slide Mr Buffett presented at Berkshire Hathaway’s annual meeting this past weekend.

Buffet observed

The hedge fund managers have done very well over that period,” Mr Buffett said, noting that, on a notional $1bn portfolio, they would have made $20m in management fees “just for coming to the office. The investors in the hedge funds have paid a very big price.”

Apparently the hedge fund industry has a new marketing approach:


So why is money still pouring into the hedge fund industry? The answer is that investors do not think of hedge funds as an alternative to stocks, but more often now as an alternative to bonds. Mr Buffett’s comparison is no longer a fair one — and the consequence is that the industry’s meagre returns will not improve any time soon.

It seems most investors should be happy they dont make the cut as "accredited investors" eligible to invest in hedge funds. But they should be wary of "hedge fund like" investments they can have access to.

Interesting btw that Buffet chose to make the wager an index fund and not Berkshire Hathaway performance vs the hedge funds.

And from the NYT

For investors in hedge funds, like big pension funds, 2014 was not a lucrative year. But for those who managed their money, the pay was spectacular.

The top 25 hedge fund managers reaped $11.62 billion in compensation in 2014, according to an annual ranking to be published on Tuesday by Institutional Investor’s Alpha magazine.

That collective payday came even as hedge funds, once high-octane money makers, returned on average low-single digits. In comparison, the benchmark Standard & Poor’s 500-stock index posted a gain of 13.68 percent last year when reinvested dividends were included.....

Still, what makes such nine- and 10-figure paychecks remarkable for 2014 is that many of the top earners had mediocre performances at best. Only half of the top 10 earners recorded returns that exceeded that of the S.&.P 500.

For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average, according to a composite index of 2,200 portfolios collected by HFR, a firm that tracks the industry. Hedge funds are lightly regulated private pools of capital open to institutional investors like pension funds, university endowments and wealthy investors.

Such large investors continue to shovel money into the $2.9 trillion hedge fund industry, desperate to make returns in an environment of near-zero interest rates. So far this year, $95 billion of new capital has flowed in.