OMAHA, Neb. (AP) — Billionaire Warren Buffett’s bet that an S&P 500 index fund will outperform a collection of hedge funds over 10 years is starting to look good at the halfway point.
Buffett made the bet in 2008 to reinforce his argument that average investors would be better off investing in low-cost index funds instead of paying hefty fees to investment managers.
Fortune magazine reported Thursday that Buffett’s index fund pulled ahead in 2012.
Buffett, who is Berkshire Hathaway Inc.’s chairman and CEO, confirmed that Fortune’s figures are accurate but declined to comment on the bet. He made the wager with the money managers who own Protege Partners LLC a few months before the recession began in 2008.
Both sides of the bet put up roughly $320,000 for the wager initially, and that money was invested. Buffett has guaranteed that the winner of the bet will be able to donate at least $1 million to the charity of their choice at the end of the bet, but if the wagers are worth more, then more will be donated.
After gaining 15.96 percent last year, Buffett’s index fund now posts a total gain of 8.69 percent. Buffett picked Vanguard’s S&P 500 Admiral index fund that’s available to large investors for the bet.
The hedge funds recorded a 2012 gain of 6.46 percent. Over five years, the hedge funds have a 0.13 percent gain.
Buffett has said repeatedly that the high fees hedge fund managers charge hurt the returns their investors might receive. In 2006, he even devoted two pages of his letter to shareholders to the perils of paying investment managers 2 percent of the principal and 20 percent of the profits each year.
The hedge fund managers at Protege Partners say their goal isn’t necessarily to beat the market every year. They say hedge funds use a variety of strategies to reduce losses in lean times and deliver positive results in a variety of conditions.
If Buffett wins the bet, he plans to donate the proceeds to Girls Inc. of Omaha if he wins. Protege will donate to Absolute Returns for Kids if it wins.
Protege has said because of the Securities and Exchange Commission rules that bar hedge funds from promoting themselves, it wouldn’t name the hedge funds involved in the bet.
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Online:
Long Bets: www.longbets.org
Berkshire Hathaway Inc.: www.berkshirehathaway.com
Protege Partners LLC: www.protegepartners.com
