This New York Times article describes how Warren Buffet bet Protege Partners, a money manager that invests in hedge funds, that they can’t beat the S&P 500 index over the next 10 years.
Both sides are putting their money where their mouths are. They are each risking enough that the whole pot is expected to be worth a million dollars in 10 years. The winner will get to contribute the wagered money to the charity of their choice.
Protege Partners manage money by choosing among hedge funds. A hedge fund is basically like a mutual fund with less regulation. To beat the S&P 500, the money invested will have to overcome the hedge fund management fees in addition to Protege Partners’ fees.
Buffett has been a consistent critic of the high fees charged by money managers, and now at least one money manager is being put to a very public test. Of course, you can’t conclude much no matter which way this bet goes. The fact that the average money manager loses to the index because of fees doesn’t change because of the results for any one money manager.
The 10-year duration of the bet underscores how long it takes to determine whether an investment strategy is sound. Too many unsophisticated investors are taken in by proponents of financial strategies with high management fees. If these investors ever figure out their mistakes, it usually isn’t until after they have been taken for a lot of money.