Protégé Partners has likely found itself on the losing end of a $1 million bet with Berkshire Hathaway chairman Warren Buffett after a group of hedge funds it selected failed to beat a Vanguard Group index fund for almost a decade.
The outcome of the wager, which concludes at the end of this year, is the latest reminder of the momentum that low-cost passive investing has gained since the financial crisis. Investors have increasingly favored index funds, which track benchmarks, over paying higher fees to money managers who make active picks in the stock and bond markets.
Buffett, a billionaire investor and outspoken critic of fund managers who profit from high fees at the expense of their clients, bet in 2007 that a Vanguard S&P 500 index fund would beat five funds of hedge funds selected by Protégé Partners over the next 10 years. Buffett laid out evidence in his 2017 annual letter to Berkshire Hathaway shareholders that he’s set to win the wager as none of the funds outperformed the index fund from 2008 through 2016.
Jeffrey Tarrant, founder and CEO of Protégé Partners, an asset manager based in New York, didn’t immediately return a phone call seeking comment.
The $3 trillion hedge fund industry, which has been struggling to outperform stock and bond markets, could see assets shrink by as much as 30 percent in the next three years if performance continues to disappoint, according to a report this month from Boston Consulting Group. By contrast, Vanguard, whose name is synonymous with index funds, attracted more money from investors in 2016 than all mutual funds and exchange-traded funds combined, preliminary data from Morningstar earlier this month showed.
“Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man — Ted Seides — stepped up to my challenge,” Buffet said in his letter, signed Feb. 25.
Seides was then co-manager of Protégé Partners, a fund-of-funds firm that focuses on emerging hedge fund managers. The Oracle of Omaha said in his letter that the five funds Seides selected had invested their money in more than 100 hedge funds, which meant the results wouldn’t be “distorted” by the performance of a single manager.
“I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where his mouth was,” Buffett said. “He has been both straight-forward with me and meticulous in supplying all the data that both he and I have needed to monitor the bet.”
Seides, who left Protégé in 2015 and is now a managing partner at Hidden Brook Investments, said in an email that he couldn’t comment on the bet because technically it belongs to Protégé.
According to Buffett, the five funds-of-funds gained 2.2 percent on an compounded annual basis in the nine years through 2016. “That means $1 million invested in those funds would have gained $220,000,” he said. “The index fund would meanwhile have gained $854,000.”
Under terms of the wager, the winnings will go to a charity. Buffet said the performance of the funds of hedge funds leaves “no doubt that Girls Inc. of Omaha, the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening the mail next January.”
