A few days ago, I read with interest a bet between Warren Buffett, CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City firm that runs funds of hedge funds. It is supposed to have a solid reputation of selecting the best hedge funds for its clients and keeping away from the laggards.
Protégé has placed its bet on five funds of hedge funds – specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.
Buffett has long argued that the fees which mutual funds, hedge funds, and funds of funds command are onerous and to be avoided by investors. He has wagered roughly US$320,000 of his own money that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected .
The bet covers a decade and is spelled out on the Long Bets website. That group will hold the wager in the form of a bond until the bet concludes at the end of 2017. The winner will then donate $1 million of the booty to his personally selected charity.
I believe the main crux of Buffett’s bet is not to win any money (he has more than enough in his lifetime) but to show the draining effects of placing one’s wealth in hedge funds. At the end of the day, you are sure to fatten the wallets of fund managers simply because there is nothing predictable in investments, except for the fees.
This topic on fees and commissions is very interesting and I will have more discussions in later posts.