My judgement of this bet would depend entirely on the basket of hedge funds in question. Lets assume that the hedge funds in question only invest in US equities. If the aggregate assets under management make up a significant fraction (exactly what that value would be I'm not sure, but I bet Buffett could figure it out) of the value of the market, then they couldn't beat the market in aggregate, and the fees would make Buffett win.

On the other hand, if these are smaller funds, and if they have access to a broader range of investments then US equities (which is highly likely), really anything goes.

I believe that the Protege argument is quite valid. You are not comparing a market index with a stock picker who is attempting to outperform the market. With hedge funds you get much lower volatility with greater consistency in returns. How has the S&P performed over the past 10 years? History is all well and good, but the domestic economy is a changing animal and the opportunity to invest internationally, hedge bets with derivatives, and provide returns in times of trouble due to varied investment opportunities allow the hedge fund world to thrive. "past performance is not indicative of future results"...

You can see more background on this bet in the Fortune article by Carol Loomis:
http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.fortune/index.htm

While I agree with Buffett that hedge funds don't usually do better than passive investment, the fact that these fund of funds can invest in broader markets beyond SP500 will provide them with an advantage.

If the fund of funds were limited to investing only in US large caps, then the odds would be more in Buffett's favor.

Even if protege is right, Buffett is almost always right, so for the fun of it, i'm voting for Buffett. Good luck!

Buffett's going to win. If you would like to know why read "The Little Book of Common Sense Investing" by John Boogle.

The problem I see with the hedge fund argument is that it's really difficult to decide to invest in a losing position (and to justify it to one's shareholders/owners). However, whether one has a short or long position, at least some choices will be made on the way up or the way down -- times when it would seem ill-advised to take such positions. Even if one were supremely informed and intelligent, market forces in managed funds favor fund managers with relatively short-term positive performance, which can endanger long-term positive performance.

Assuming that all returns exclusive of capital appreciation (dividends and other distributions) are reinvested in the S&P 500 fund automatically, whereas the "fund of funds" actively manages these returns, by virtue of dollar cost averaging the S&P 500 fund will have an advantage.

it will likely be a bear market for equities for a good portion of the next ten years, so FoHFs stand a chance to outperform the S&P, simply because they will be short certain stocks (e.g. financials)

Am quite a novice when it comes to hedge funds and such, but I would never vote against one Warren Buffett. Time will tell.

Betting against Buffett is highly ill-advised. But this long bet is not about Buffett or even betting against him. It is FoHF (carefully selected portfolio) vs S&P500 and as pointed out by others, it is probably a case of oranges vs apples. Smart active managers vs an index (that at best represents the average investor). Can smart active managers outperform the index by a margin that exceeds costs/expenses? Buffett may be philosophically opposed to the idea of hedge funds and their dubious value creating contribution, but in the huge hedge fund universe, surely there must be some good smart fund managers? If Protege (smart and experienced?) picks the wheat from the chaff - managers who actively develop and execute good strategies - they can achieve home-runs, whether the S&P 500 goes through thick or thin. Because of this asymmetry, I vote for the intelligent investor (Protege?) instead of the average investor (not Buffett).

The hedge fund argument that:

"Through a cycle, nevertheless, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. We believe such results will continue."

is the one I find suspect. The class of "top hedge fund managers" is one that changes over time, and I suspect membership in the category is due more to luck than to skill. Long-Term Capital Management was run by smart guys, but their calculations of risk were faulty.

... Buffett dies before 10 years elapse? What are the terms for that scenario? Does the charity still acquire the money???

I am siding with the challenger simply because I am aware of the history. There are currently hedge funds out there that have outperformed the S&P over a ten year consecutive span, net of fees.

With that in mind, assuming the challengers have a good hand in picking and switching funds when needed, they will have no problem winning this bet.

Given limited information, I respectfully disagree with my teacher Warren Buffett.

S&P 500 would deliver returns in the region of 8-10% compared to returns of around 12-15% by a portfolio of top hedge funds.

According to CNN Money.
It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.

Simply today's $640000 value more than $1million after 10 Year. Can't these money go to Girls Inc. of Omaha now to get better value on $s.

Within 10Year + to S&P is dividends; splits and more. (with over 20year history has gone thru couple of ressesion)
Within 10Year - to Hedge is FEES atleast 1.5% each quarter on fund.(Pre-Mature - not sure has gone thru any ressesion)

Yes, it's very interesting to see what happens...
Good luck, and see you in 10 years (I hope!)

-Steven Burda

www.linkedin.com/in/burda

I have no strong opinion about the bet, but I am grateful for the boost that Mr. Buffet and Protege have given to the stature and visibility of longbets.org. I notice several bets (including my own #197) have picked up a lot of votes and comments since the bet was made. I was afraid the longbets site was fading into obscurity.

I'm siding with Protege. While Warren is likely correct for most investors, I believe Protege's principals have the demonstrated skills to be one of the few who will do better than the S&P500.

F.L. Baker III

If you assume that the S&P stays negative for this year, returns nominally next year, then averages 10-12% like it has historically until the end of the 10 years, when there will probably be a boom (maybe the rumored 2nd tech boom), then on these very rudimentary assumptions, the annualized return that these FoFs would have to outperform may be around 17%. (Note that between 1990 and 2000, where there was at least one boom and bust, the S&P returned about 14% annually). So its doable, but tough. like someone else said, it really depends on the funds picked. Technically they have an advantage, but they are up against Warren Buffett...now if George Soros was on the other end, now that may be something different.

I'm full of admiration for all of the above intelligent, knowledgeable comments--but my two cent's worth goes loyally to WB, in hopes that he will be able to personally turn over the funds in ten years, with a good Nebraska quip.
Beverly Crandall

Warren’s common sense and track record speak for themselves.

Fund of funds - so many layers of fees ...

I am a great admirer of Warren and Charlie and biased but the odds are - I think again - in favour of the Oracle.

Very ironic that Mr. Buffett would take a truism, that the average active investor lags the market, and take a bet against specific investors. Mr. Buffet not only has demonstrated that it can be done, and claimed that he (if he was running a smaller fund) could do it by a large margin, but he runs a hedge fund himself. Berkshire is in essence a large publicly traded hedge fund. The original Buffett Partnership was a hedge fund.

With my eyes closed.

Buffet was wise to make it a bet on fund of funds rather than just a basket of hedge funds. Not only does the bet contain an extra layer of fees and an extra layer of active investing (picking the best stock pickers), but also it forces real world capacity and liquidity constraints. Specifically, not every hedge fund is open for investment, and those that are have lock up periods limiting liquidity and gating provisions limiting redemptions. One can certainly pick five funds today that would beat the S&P over ten years net of fees - problem is, those funds are closed to new investors. In addition, as institutional investors become smarter about illiquid hedge fund investments, the return profiles will change drastically.

However, the Protege team were wise to extend the bet to 10 years. Why? Because within the next decade, hedge funds and fund of funds fees will come down due to competition for assets for smaller funds, more funds going public, educated institutional investors going "fee" shopping, mutual funds being allowed to short more, and the gradual retail-ization of hedge funds allowing them to be marketed (and compete) more openly. The de rigeur management and performance fees of today will be a distant memory (though they will still exist). I'll even predict that many fund of funds will go to a flat performance fee and no management fee within five years. Hence, even if Buffet is right on the performance prediction today, the promise of future fee reductions alone may undo his wisdom.

I'm excited to see what happens.

First, just wanted to comment on Lance Paddock...the difference between Buffett and the others (assuming they are as good) is the fees! It is instructive to compare the Buffett partnership fee structure & Buffett's current salary with current trends in hedge fund management fees.

Other differences come up, i.e. it was a lot easier for Buffett in an era of pen & paper, inefficient markets, less talent devoted to the business (lots of high IQ people were into science and engineering then, as opposed to creating algorithmic approaches to making money on the market today), etc. But the fee difference is enough to make my point. The fund may perform like hell, but the smart hedge fund managers will enjoy the benefits (by definition, they are smarter than their investors), not the investors.

From Protege's perspective, they stand to gain substantially from the bet, even if they lose it. By taking a bet against Buffett, they have pulled off a major marketing coup. They will probably be laughing in ten years from all the extra fees they will have collected from the additional publicity.

I think Buffett will win the bet, but it won't matter to Protege because they will have bought their yatches!

I think Buffett's real charitable contribution here is that he's found a great way of telling everyone to use an index fund. That's great advice. Note that even Buffett gives Protege a 40% chance of winning. That's because they will have picked specific funds and there is great variance in individual funds. If there were a trustworthy source that aggregated all the hedge fund and fund of funds data, then the 500 index would probably have much higher odds of winning than 60%.

Does anybody know if this bet will be measured pre-tax or post-tax? This will change the odds dramatically. (After-tax favoring Buffett; Pre-tax would favor Protege...)

If Buffett is correct - nobody really benefits (except for Buffett's own vindication). If Hedge Funds are correct - a mass of billions of dollars in fees and income to the managers is secured. Buffett has no reason to mislead...financial services firms have all the reason in the world to do so. I go with Buffett.

Hi, where I can rean news on this site?

Hi, how I can find the team who make this site?

Am I the only one who is noticing that Warren Buffet runs an actively managed fund (OK, a holding conglomerate, but they are similar in practice)? Why is he on this side? Is he just saying that hedge fund managers can't do as well as him?

Despite being spam, the above comment got me thinking that this site should really internationalize, either that, or add one of the many website translation options that are available.

The bet says 'a portfolio of funds of hedge funds', but does not name a specific portfolio of funds of hedge funds. Does this mean Warren Buffet believes the S & P 500 will outperform ANY fund of hedge funds measured over 10 years?
This is a much stronger statement than the S & P 500 will outperform one specific fund of hedge funds.
I'm fairly ignorant of the details here, but isn't the business model of these funds to convince investors to give them a bunch of money and then charge the investors fees? If the funds outperformed the 'average' consistently, then wouldn't it make sence for the fund to invest in itself rather than give it's customers the opportunity? The expected returns of running the fund must outperform the expected return to the fund's investors( customers ), otherwise why have customers (investors)? To get customers, the fund must only outperform the average of all funds, not the S & P 500. If there were a real lack of potential customers suceptible to fund manager's marketing departments' wiley ways then there would soon be less funds soon. That there are as many as there are, indicates the opposite.
It could very well be that when a fund does well over the short term, then that having-done-wellness is monetized as soon as possible by the fund as the basis for marketing hype. If the fund then subsequently does well, higher fees are charged. If the fund does bad, then it wasn't the fund manager's money anyway, they can always start another fund. But if the fund does well then it's the basis for more hype and still higher fees.
Maybe Buffet believes the 10 year time frame is enough to nullify any aparent smartness. He may believe that all such apparent smartness is ultimately attributable to dumb luck. Someone may flip a coin once a day for a month and come out 90% heads, but it doesn't mean he's skilled at flipping heads - over 10 years his heads to tails ratio will be approximately 1:1.

In the market, you have to have a trader (or fund manager) buying and someone selling in every transaction. Neither will profit immediately, because the broker will take a transaction fee from both. In time, as the price fluctuates, one of them will be seen as making the "right" move, and the other as making a "wrong" move. Give it some more time, and the positions might reverse. To be a "good" trader, you have to perfectly time your entry, and your exit. And you have to be able to do this consistently. Once you exit, you have to find another position better than the one you just left (otherwise you made the wrong move by closing your position).
There are too many unknown variables compounding at every transaction for anyone to be consistently right.

A very few (statistically insignificant amount) of people get lucky (sometimes for extended periods), but in the long run the only one who consistently wins in active trading is the broker collecting the fee at every trade.

Fortunately, you don't HAVE to trade to make money. There are companies who own assets that appreciate in value. They provide goods and services that add to our economy and earn the company a profit. The profit is returned by expanding the companies assets or paying the profit out as a dividend to owners.
Buy these companies and hold on to them as they appreciate and reap profits. This is how Buffet made his money. Not by trading (what an actively "managed" fund does to justify their "management fees").

If you have the time and skill to find the best companies, do it. If you don't have the time and skill, buy them all (an index fund) and hold them to reap their profits.

Give it time, and you will make more money holding onto the stock (and reaping the companies profits) then trying to guess which direction the market is going at every point in time.

http://www.thestreet.com/_yahoo/video/mutualfundrpt/10419432.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA#10419432

It's not that there won't be market beating hedge funds / traders / active managers.
The point is that you can't pre-select who the "winners" will be. There will be way more "losers" (fail to beat the over-all market) than winners in the active trading game.

This guy makes an interesting analogy:
http://www.mymoneyblog.com/archives/2007/02/investing-in-actively-managed-funds-deal-or-no-deal.html

Buffett has a huge edge in this bet.

Of course in the long run Mr. Buffett is right, but what if around Christmas 2017 some members of the S&P 500 take a hit and Protege Partners happen to have shorted them? A decade-long dominance by the 500 could reverse at the last minute, only to return to average dominance by the 500 later.

This is a bet not only about long-run averages, but about volatility. Investors wouldn't be constrained to take out their retirement savings on a particular day of a particular year so Mr. Buffett still advises them well.

I think Buffett has a great chance to win this bet. But this doesn't mean that hedge funds and funds of funds cannot celebrate their short-lived success. I learnt that commercial bank and investment bank are the most important economic inventions in the 19th century. And I think hedge funds cannot be for the 21st century that's because it's also helpless in crisis now. I cannot take away the traditional businesses belonging to Wall Street either. You can also assume that for their sizes and the foundations of their beginning--leverage. Built on dangerous tools can only lead to failure. But if the transition of current economy takes at least for two decades, it equals to the counterpart's winning. That's a not so good news for the global economy. So, you can see, that Mr Buffett is indeed betting on our economy. I also bet on that, and I'll say that a change is in sight.

At first, I think that American economy becomes prosperous to be dominant to the world economy, and then I think that devaluation of U.S. dollar is unchangeable for the current trends, but since the crisis, no one has mentioned that point. You know, if USA government implement actions now and cannot wait till the outer markets respond to the crisis, then the government lets alone its future prosperity and I think this is irresponsible. So far, I have got new rescue ideas for the government because I haven't studied it yet. But the only sure thing I can guarantee is that the more actions, the quicker for the devaluation if government not manipulate it and I think it cannot. Oh, my God, a man-made crisis.Then the more governments, the better. USA's economy is very strong though.

I wonder how this coming (or should I say ongoing) recession will play out on this bet. Depending on the severity of this crisis it could take 2-8 years for an economic recovery.

I think Mr. Buffett's investment in GE and Goldman Sachs is not only a liquidity matter, but also a reputation and prediction matter in such a crisis which I think is way beyond value investment. There is no fresh news from his rival, he tops in this round.