Warren Buffett’s celebrated bet that the S&P 500 will outperform a portfolio of funds of hedge funds springs to mind in the wake of Berkshire Hathaway’s recent $400 million haircut as a result of Wal-Mart’s share-price decline. Although the Wal-Mart loss was a stinging one, it fell short of the $600 million plus loss Berkshire suffered with his bet on IBM. Yes … “Big Blue” may best describe the bruising the “Oracle of Omaha” just received.
Currently, Berkshire Hathaway is not (at this writing) outperforming the S&P 500 , which is up 4.48%, as compared to BRK-A, which is down 1.54%, a differential of about 6%—and not in Buffett’s favor.
Of course, these events represent nothing more than a snapshot in time. Everyone gets that, just as almost everyone gets the irony of Buffett’s present circumstance.
How’s the Bet Shaping Up?
Although current numbers are not available, this Financial Times article shows results through most of April, 2015 where it is apparent that Buffett is winning … so far. Protégé Partners, LLC, the second party to the wager, had net gains (after management and performance fees) of 19.6% compared to aggregate gains of 63.5% for the S&P 500.
Of course, with 25 months to go until December 31st, 2017, the end-date for this game of chance, anything could happen. One can only speculate on how many Wal-Mart and IBMs wait in the wings, any or many of which may show their hand before the contest ends.
What Are the Take-Aways?
Apart from the fact that Warren Buffett has little respect for hedge funds, their managers and the contribution hedge funds make to liquidity in our financial system, one take-away might be that his view is not widely accepted by institutional investors and high net worth individuals, who continue to invest heavily in hedge funds of all stripes.
At this bet’s inception on January 1, 2008, hedge fund assets under management were just north of $1.4 trillion. In the years that followed, hedge fund AUM has accelerated to more than twice that figure; a particularly stunning achievement given the fact that in no year since the clock began running on this wager have hedge funds out-performed the S&P 500.
The S&P 500 as a Benchmark
Institutional and high net worth individuals understand that the S&P 500 is not the ideal yardstick against which to measure hedge fund performance. More to the point, hedge fund investors understand there is a price to pay for investment expertise which, in the case of hedge funds, is manifested in management and performance fees.
The downside of Mr. Buffett’s bet against hedge funds is that less sophisticated investors may be persuaded to confine any foray they make into the investment world to one index fund or another with a result that might not mirror what has occurred in the highly regulated post financial crisis market of the past seven years.
Clearly those investing in hedge funds perceive an intrinsic value that Mr. Buffett is dismissing. It would behoove fledgling investors to learn what that value is.