Dont bet against 84-year-old Warren Buffett. In 2014
the Oracle of Omaha widened his lead over fund-of-hedge-funds
firm Protégé Partners in the seventh year of a
decadelong gamble. Back in 2006,
Buffett, who is chairman and CEO of $517 billion Berkshire
Hathaway, offered to bet any taker $1 million that over ten
years and after fees, costs and expenses, an S&P 500 index
fund would beat ten hedge funds selected by his opponent.
The following year New Yorkbased Protégé
Partners took him up on a version of the wager by selecting
five funds of hedge funds. In addition to seizing the
opportunity to correspond with the worlds greatest
investor, our purpose for accepting Buffetts challenge
was to inform the public about the benefits of hedge fund
investing for sophisticated, institutional investors, Ted
Seides, co-CIO and president of Protégé Partners,
wrote in a 2008 white paper titled A Bet Against Buffett
Can Hedge Funds Beat the Market?
Buffett put his money on the
Vanguard 500 Index Fund Admiral Shares, which have risen
63.5 percent after fees since the bet was placed in 2008. The
funds of funds that $2 billion Protégé chose
have advanced an estimated 19.6 percent on average after fees
during the same period, according to Carol Loomis of
Fortune magazine, who has been exclusively tracking
the bet from the start. Buffett has come out on top every year
except the first, when the funds of funds fell 24 percent,
versus a 37 percent drop in Admiral shares.
Buffett and Protégé, founded by Seides and CEO
and co-CIO Jeffrey Tarrant in 2002, have already put aside more
than they need to cover the bet. In January 2008 both parties
invested $320,000 in a zero-coupon U.S. Treasury bond that was
expected to be worth $1 million by 2018.
The funds were later transferred to stock in Omaha,
Nebraskabased Berkshire Hathaway as interest rates fell,
bringing their original $640,000 allocation close to its target
five years early. Buffett promised to make up the difference if
the Berkshire Hathaway stock wasnt worth $1 million by
December 2017; as of last December it was valued at some $1.68
Although Buffett holds a commanding lead, its tough to
say who will emerge the winner after the final three years. The
Federal Reserve Boards contentious $3.5 trillion
bond-buying program has helped prop up the U.S. economy since
December 2008. The HFRI Fund Weighted Composite Index,
published by Chicago-based Hedge Fund Research, rose just 3.57
percent in 2014, extending to four years its run of
single-digit returns. Meanwhile, the S&P 500 index gained
some 12 percent and has beaten the HFRI Composite by double
digits in three of the past four years.
These seven lean years for hedge funds may go down in
the annals of market history as a period driven singularly by
central bank stimulus, Protégé Partners
concludes in its February 2015 white paper Seven Lean Years
in a Bet with Buffett. Using that lens, it becomes
less clear that the bet, if lost, proves that hedge funds are
not worth an investment across a cycle.
But the stock market lost that crutch in October, when the
Fed halted its stimulus program. Historically, the S&P 500
hasnt responded well to the end of quantitative easing:
In the three months after so-called QE1 and QE2 ended, the
index fell 12 percent and 14 percent, respectively. Hedge funds
and other alternative-asset managers should have a better shot
at beating the market this year.
In the end the real winner is charity. The $1 million will
go to the victors cause of choice: nonprofit Girls Inc.
of Omaha if Buffett triumphs, or London-based philanthropic
organization Absolute Return for Kids (Ark) if
Protégé pulls ahead.
Buffett is willing to part with a lot more money in
theory, anyway. Last year the legendary investor teamed up with
retail lender Quicken Loans to offer $1 billion to anyone who
flawlessly filled out the National Collegiate Athletic
Associations March Madness basketball tournament
The chances of winning the contest are slim (1 in 9.2
quintillion, supposedly), which would explain why nobody has
ever correctly forecast each games result. Buffett is
reportedly looking to make the same offer this year. Go ahead
and try your luck but if Buffetts $1 million wager
with Protégé Partners shows anything, its
that he doesnt like losing a bet.