Tuesday, June 10, 2008

Buffett Bets Against Money Management

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.


  1. I read about this elsewhere too and what makes it more interesting is that the money manager can pick funds that invest outside of the US - which confuses the issue a little bit. For example, if the US has another "lost decade" while the rest of the world shines, than even if the money manager underperforms a relevant weighted average benchmark by a significant amount, Buffett may lose his bet and some might suggest that money managers have won out, when in fact it is possible for both the money manager to lose and for Buffett to lose in this scenario.

  2. Preet: I agree. The outcome of this bet doesn't really mean much. It's more of a chance for each side to back up their claims with money. It would be a better test to average the results of 100 different money managers against a world-wide benchmark index.