Warren Buffett\u2019s disparagement of hedge funds isn\u2019t news, but many may not be aware that he is \u2018putting his money where his mouth is\u2019 these days. The \u2018Oracle of Omaha\u2019 and Prot\u00e9g\u00e9 Partners placed $1 million on a 10-year wager against one another for charity. The bet\u2014Buffett\u2019s money is on a Vanguard S&P 500 index fund and Prot\u00e9g\u00e9 Partners\u2019 wager is on their chosen five funds.<\/p>\n
While we have yet to see who will win, Buffet believes that from 2008 through 2017 the cumulative returns of the broader S&P 500 index fund will outpace the hedge fund. In the eighth year of his bet, Buffet\u2019s thinking may have already been vindicated. As of the end of 2015, the Vanguard S&P 500 index fund yielded cumulative returns of +65.7% versus Prot\u00e9g\u00e9 Partners\u2019 chosen five funds\u2019 that have returned +21.9%.<\/p>\n
With less than two years to go before the wager expires, the results so far suggest the \u2018Oracle of Omaha\u2019 will win this bet.<\/p>\n
Buffett Derides Hedge Fund Fees<\/strong><\/p>\n At Berkshire Hathaway\u2019s most recent annual meeting, a wide range of business and political issues were discussed including a highlight from Buffett himself scorning the fees and compensation structure of overpromising hedge funds\u2014as he called it \u201cunbelievable\u201d and a major source of investors\u2019 return dilution. Often times, what you see in the hedge fund industry is an annual management fee plus a percentage of the profits produced for clients. It\u2019s a fee structure that\u2019s almost always higher than what is assessed by traditional asset managers, but the returns don\u2019t necessarily warrant the extra fees. At least, not as of late.<\/p>\n Buffet\u2019s views strongly echo those of the New York City Employees\u2019 Retirement System (NYCERS). After being disappointed with hedge funds\u2019 exorbitant management fees relative to underwhelming returns, the NYCERS pulled out all of its hedge fund holdings\u2014an estimated $1.5 billion portfolio. Similar actions were taken in September 2014 by California\u2019s Public Employees\u2019 Retirement System (CALPERS).<\/p>\n Buffett\u2019s aversion to hedge funds isn\u2019t surprising given his investment discipline. The discipline, similar to that practiced here at Zacks Investment Management, is a long-term approach focused on achieving optimal performance on a risk-adjusted basis. A key here is managing risk. Often, investors do not adequately and systematically factor risk into their investment decisions which can undercut performance over time. Focusing on long-term gains this way is in great contrast to the hedge fund approach that is far riskier and focuses on chasing quick bucks. Berkshire Hathaway\u2019s 2015 annual shareholder letter reiterates the importance of holding onto well-diversified portfolios for the long haul, just as we do here at Zacks Investment Management. In the same letter, Buffett even mentioned that investing in businesses with \u201cterrific economics\u201d could still turn out to be a dubious decision if excessively overvalued.<\/p>\n Buffet\u2019s stance is quite the opposite of hedge funds\u2019 tendencies to chase momentary \u201chot trends\u201d or \u201cstyle boxes,\u201d while possibly overlooking company-specific fundamentals along the way. As a consequence, many of these funds undergo distress during volatile times. In 2015, there were 979 hedge fund liquidations, the highest since 2009. This occurred as a result of investors\u2019 decreasing risk appetite amid market volatility, which led them to withdraw from underperforming funds. These cases strongly support Buffett\u2019s views on the vagaries of hedge funds\u2019 long-term potential.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n Here at Zacks Investment Management, we strongly agree with Mr. Buffett that the discipline of owning quality for the long-term is a winning approach, and our investment strategies reflect this philosophy. We believe that a diversified equity portfolio can produce long-term annualized returns that outperform just about every other asset class.<\/p>\n \n","protected":false},"excerpt":{"rendered":" Warren Buffett\u2019s disparagement of hedge funds isn\u2019t news, but many may not be aware that he is \u2018putting his money […]<\/p>\n","protected":false},"author":1,"featured_media":4124,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[54,71,72],"tags":[],"class_list":["post-3242","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-company-news","category-private-client-group","category-steady-investor-news"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3242","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=3242"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3242\/revisions"}],"predecessor-version":[{"id":11351,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3242\/revisions\/11351"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=3242"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=3242"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=3242"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}