By: Laura Walton AFC®
It’s Warren Buffett in beige and white trunks in the index fund corner vs. Ted Seides in red and gold trunks in the hedge fund corner – who’s winning this 10-year bet?
A recent NPR Morning Edition story brought us up to date on this 2008 bet. Apparently Buffett responded to a question about hedge funds (actively managed funds designed to beat the market, typically used by wealthy investors) by saying “most hedge funds just are not worth the fees they charge”. “In fact,” he said, “I’m willing to make a bet. I can pick a simple, boring investment that will beat any bunch of big hedge funds.”
Ted Seides of Protégé Partners, LLC took his bet. Ted chose a fund comprised of five different hedge funds while Warren chose Vanguard’s S&P 500 Index.
The NPR reporter made a good point. If you have money invested in the stock market, you’ve got an interest in this bet. After all, it’s the passive index fund investor versus the actively managed fund investor and/or the stock picking investor.
Warren’s position: “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”
Ted’s position: “There is a wide gap between the returns of the best hedge funds and the average ones. This differential affords [me] an opportunity to pick strategies and managers that [I] think will outperform the averages. Funds of funds with the ability to sort the wheat from the chaff will earn returns that amply compensate for the extra layer of fees their clients pay.”
So, who’s winning? Drum roll……the Vanguard’s S&P 500 Index is up 66% while the fund of hedge funds is up 22%. The boring beige and white trunks are trouncing the flashy red and gold trunks…
Here’s the fun exchange between interviewer David Kestenbaum and Ted Seides:
Kestenbaum: Are you bummed about probably having lost this best?
Seides: A little bit. Sure.
Kestenbaum: Yeah, you had a chance to beat Warren Buffett.
Seides: Yeah – with the odds in my favor. And it didn’t play out the way I thought it would.
Kestenbaum: You thought the odds were in your favor?
Seides: (Laughter) I still think the odds were in my favor.
Reporter comment: Seides says he would take the bet again if he could. He thinks it’s a fluke that the stock market – and, with it, the index fund – has done as well as it has over the past 8 years.
Kestenbaum: Isn’t it also possible that it is just very, very hard to beat the market?
Seides: Oh, it’s not possible. That’s a truth.
Kestenbaum: What’s your advice to ordinary people who do not have a lot of money but want to put some of the money in the stock market?
Seides: I think they should index. But the bet’s not over until December 31, 2017.
The good news – the money will go to the charity of the winner’s choice – stay tuned!