Question for the Board

[rick_v]

Does anyone remember a few years back, Buffet bet a certain hedge fund that in x years they would not outperform the indices. I am trying to find that bet I think it was for one million dollars. TIA

[Parsad]

http://www.canadiancapitalist.com/buffetts-bet-against-hedge-funds/

 

Cheers!

[rick_v]

I love buffet's frugality, gee I wonder who's idea this was:

 

"The money involved in this bet is $1 million -- sort of. That qualification is necessary because of a present-value factor. Each side originally put up $320,000 as its wager. The total funds of about $640,000 were next used to buy a zero-coupon bond that will have appreciated to a value of $1 million at the end of 2017, when the bet concludes."

 

so buffet... compound interest baby

 

I am with Buffet on this one.

[twacowfca]

Thanks for the update post on the bet, Sanj.  WEB's pick, the Vangard S&P500 Index Fund is currently about 10% behind the average of the 10 best hedge funds he's going against, quite a comeback from the 25% or so that he was down relative to them at the market's bottom.  Does anyone know if the Rennaisance Medallion fund is one of the ten funds he's going against?  Normally it's closed.  If not, I think WEB will win the bet.  If so, it will be a close call unless the large cap market takes off in the years ahead.  In that case WEB should win, hands down!

[rick_v]

No Twacow the bet is against "Funds of Hedge Funds", if it was purely against hedge funds I would argue that there are several managers that could consistently beat the index. I don't find it too hard myself...

 

But when you add another layer such as the Fund of Funds, Buffet argues that you are really over-time not providing any service because of all the added fees.

 

Protege is not a bad Fund of Funds either, they have good contacts and some of their capital is deployed with great managers. I still think Buffet has a chance here.

 

 

[twacowfca]

No Twacow the bet is against "Funds of Hedge Funds", if it was purely against hedge funds I would argue that there are several managers that could consistently beat the index. I don't find it too hard myself...

 

But when you add another layer such as the Fund of Funds, Buffet argues that you are really over-time not providing any service because of all the added fees.

 

Protege is not a bad Fund of Funds either, they have good contacts and some of their capital is deployed with great managers. I still think Buffet has a chance here.

 

 

 

Generally agree, but Protege picked 10 specific hedge funds for this bet, if I'm not mistaken.  I think the bet was against these specific funds' net returns, including Protege's rake off, not a changing mix of funds that that fund of funds manager might flip during the term of the bet.  :)

[rick_v]

I would argue that the second you pick more than one hedge fund that package as a whole is a Fund of Funds. Buffet isn't stupid I recall him saying that he wanted Protege to reflect what a typical HNW investor would do. Naturally they wouldn't just allocate capital into one fund.

 

GS for example is notorious for doing this. When I was a client, they would keep showing me the various asset class funds which generated returns for the previous year. It would be all dolled up with power points and colors indicating the return for each respective asset class. The one from 2007 is incredible.. 100% wrong on every assumption they made.

Good think I never allocated any capital to those funds.

 

Buffet wants to see the net return a Fund of Funds investor would see over time and his argument (which I agree) is that over time because the fees are screwing up the compounding of capital a diversified portfolio of hedge funds (fund of funds) will underperform an index fund. This is a very sound thesis and I hope its proven right. Funds of Funds guys are typically type A Harvard or Yale people who can't choose stocks for shit but are social with all the good stock pickers. They sell access to fund managers basically. Their existence in my opinion is completely unnecessary.

[twacowfca]

I would argue that the second you pick more than one hedge fund that package as a whole is a Fund of Funds. Buffet isn't stupid I recall him saying that he wanted Protege to reflect what a typical HNW investor would do. Naturally they wouldn't just allocate capital into one fund.

 

GS for example is notorious for doing this. When I was a client, they would keep showing me the various asset class funds which generated returns for the previous year. It would be all dolled up with power points and colors indicating the return for each respective asset class. The one from 2007 is incredible.. 100% wrong on every assumption they made.

Good think I never allocated any capital to those funds.

 

Buffet wants to see the net return a Fund of Funds investor would see over time and his argument (which I agree) is that over time because the fees are screwing up the compounding of capital a diversified portfolio of hedge funds (fund of funds) will underperform an index fund. This is a very sound thesis and I hope its proven right. Funds of Funds guys are typically type A Harvard or Yale people who can't choose stocks for shit but are social with all the good stock pickers. They sell access to fund managers basically. Their existence in my opinion is completely unnecessary.

 

 

Completely agree.  Cheers!

[Guest]

From what I recall, Buffett originally wanted 20 hedge funds within the fund of funds, but couldn't find any takers.

 

I also recall reading something else from Protege and Buffett. Protege said that their calculations gave them an 85% chance of beating Buffett while Buffett gave himself about a 60% chance of beating Protege.

[twacowfca]

From what I recall, Buffett originally wanted 20 hedge funds within the fund of funds, but couldn't find any takers.

 

I also recall reading something else from Protege and Buffett. Protege said that their calculations gave them an 85% chance of beating Buffett while Buffett gave himself about a 60% chance of beating Protege.

 

As they say, past performance is no guarantee of future performance.  I don't think WEB would have made the bet if he didn't think he had better odds than that.