> "Comparing hedge funds and the S&P 500 is a little bit like asking which team is better, the Chicago Bulls or the Chicago Bears. Like the Bulls and the Bears in the Windy City, hedge funds and the S&P 500 play different sports."<p>That, to me, is a CRAZY statement to make. Both ETFs and hedge fund are financial funds that a person considers putting their money in with the intention of maximizing their return. To say that they "play different sports" is at best stretching the truth, at worst a lie.<p>> "The unexpected strength of the S&P 500 was a key contributor to Warren’s victory. Despite trading for a high multiple of earnings and facing an elevated level of risk, the S&P 500 performed in-line with historical averages."<p>So the "unexpected strength" came from performing "in-line with historical averages"?
> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory."<p>Great Ted, so instead of complaining about why you lost, just make the same bet again at even higher stakes.
Maybe I'm too biased (in Buffett's favor) but this reads like Seides saying: Sure I lost but Buffett only won because he was lucky.<p>>> "My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory." <--- Reeks of the Gambler's fallacy.
Strange that he doesn't even mention let alone discuss that the primary reason he lost may just be the reason Buffett originally cited which was the high fees of hedge funds/active management. That in most if not all market conditions, high fees preclude a better average return than index funds.<p>The only reason Seides provided which I found somewhat persuasive was that hedge funds tend to do better in downturns -- this is probably a traditional hedge fund that's actually hedged. I wonder if adding such hedging to an index fund in an automated way would improve performance or not?! Not sure if it's been tested.
Ex fund manager here. Some things about this bet that need to be mentioned:<p>- It should be risk adjusted. No idea how the numbers come out, but what's the sense in comparing the return without the accompanying variance? For example if the S&P has 15% vol over the period but the hedge fund 30%, that factor of two needs to be taken into account somehow.<p>- Management fees of 2% are clearly too high for this day and age. They came about historically when hedge funds were collections of small amounts of money, happy to take large risks. If you're willing to have volatility of 36%, paying 2% a year is going to be different from paying 2% for 12% vol. Part of the reason vol is lower is institutional investors are not HNWs. I used to run a fund that ran 36% vol as a target, and the IIs came to us and said they couldn't present it to their superiors. The explanation that you could just put less capital in didn't seem to resonate with the box checkers. Must be something that Kahnemann and Tversky could illuminate.<p>- I'm not sure the thing about the S&P being unnaturally strong is a valid excuse. If you're a hedge fund, you are free to just do a leveraged play on the S&P, thus beating it if you think it's going up. Same goes for what will inevitably come up, the extraordinarily loose monetary policy following the crisis. Whatever caused the S&P to go up, you could have bet on it.<p>- The bets are against funds-of-funds, which compound fees. You might be paying 2/20 to the underlying funds and 1/10 to the manager of this portfolio. That's a pretty big chunk. Normally what the FoF says to its customers is they have access to funds that others don't, through good relationships gained over years. Though looking at the summary in Buffett's letter it looks like even if you added ~30% for the 10 years of fees to each group, you still wouldn't beat the S&P. But that's just my late night eyeballing, perhaps with the performance fee it would be in the ballpark.<p>- Buffett stipulated it had to be multiple funds-of-funds, probably because this would mean you'd get S&P with costs. What else are a bunch of mainly American hedge funds going to invest in, given you have hundreds of underlying funds? You might get the odd emerging markets fund, but they'll be swamped out by the hundreds of generic funds that just punt some US stocks. Restricting it to funds-of-funds is actually pretty smart, because FoFs are going to tend to be conservative and take a selection from the buffet (yeah I said that). Allowing individual hedge funds might have given a very different result.
> Warren and I have written during the past two years that he will win the bet <i>absent a market crash</i>. Hedge funds tend to significantly outperform in bear markets, as demonstrated in 2008 and 2000-2002.<p>This bet started in January 1st, 2008 shortly <i>before</i> the market crash of 2008. What could Ted Seides mean by bringing this up? It seems to just reinforce Buffet's win.
Well, this almost 10 year period didn't teach anything to this guy, or, more probable, he's just trying to defend a rigged industry.<p>Basically, he's saying that Warren won by luck, while in truth it wasn't even close. It's worth to state this clearly - the passive index did a 85.4% return up to date, while the five funds did 2.9%, 7.5%, 8.7%, 28.3%, 62.8%. You do the math.<p>If there is one guy in this world that understand how economy and markets work, it's Warren. And he has a ~60 years track record to back this up.
I clicked on the link expecting to read an elaborate version of "I lost the bet because I was wrong," perhaps followed by a detailed inquiry into the facts and reasons that motivated Buffett -- a man with a long history of NOT losing bets -- to take the other side of the bet. That's what one is supposed to do when things go wrong, right?<p>Instead, Mr. Seides lays out in this article six reasons why, despite losing the bet, he's still right.<p>Which begs the question:<p>Why did he agree to the bet in the first place?
I love this part:
>"But the S&P 500 defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return."<p>He must know that 7% is something of a magic number, it's what Jeremy Siegel argued is the steady, annual inflation-adjusted gains for equites for the past 200 years in his seminal book "Stocks for the Long Run," which was written in 1994 and is <i>the</i> foundational argument for passive equity investing ("Irrational Exuberance" and others argue directly against it).<p>The fact that the S&P 500 did 7.1% over 9 years is only "lucky" if you ignore the precise argument that Buffet, Siegel and many others make.
If anyone was curious about how Berkshire Hathaway did over a similar period:<p>3 May 2007-3 May 2017<p>S&P 500: +60%
Berkshire Hathaway A (BRK.A): +129%<p>Dude is good.
I'm heading to Omaha tomorrow for my first $BRK shareholder meeting this weeekend. Super excited to hear Warren and Charlie speak and answer questions. Warren just has incredible discipline (way above most people). He does not let emotions get the best of him. All of his decisions and investments are calculated and thoroughly researched.<p>"People who mix their politics up with their investment activity.... I don't think that makes sense." -- Warren Buffett
For bet details: <a href="http://longbets.org/362/" rel="nofollow">http://longbets.org/362/</a>
[edit: grammar]
>No. 6. Long-term returns only matter if we invest for the long term<p>>Studies of human behavior repeatedly point to the inability of investors to stay the course through tough times.<p>I'd like to see some studies of this with, for example, 401k accounts. Do people actually pull out of indices and into bonds when their the index is really far down?<p>I could see a marked difference in behavior between retirement accounts and taxable accounts; those with taxable accounts are probably going to feel much more like they need to <i>do</i> something, since they had to do something to make the buys in the first place.
There are two main reasons why index funds outperform active funds.<p>1. Fees. Active funds start as underdogs because of their fees.<p>2. The distribution of returns in the stock market is very uneven. Just handful of well performing stocks at any moment account make significant gains in market. Index funds pick these winners every time. Active funds start as underdogs even in the stock picking game.<p>Why Indexing Works, Heaton , Polson and Witte, 2015. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262" rel="nofollow">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2673262</a><p>> The risk of substantial index underperformance always dominates the chance of substantial index outperformance, with the difference being greater the smaller the size of the selected sub-portfolios. It is far more likely that a randomly selected (small) subset of the 500 stocks will underperform than overperform, because average index performance depends on the inclusion of the extreme winners that often are missed in sub-portfolios.
> defied the odds and rewarded investors with a historically normal 7.1 percent nine-year annualized return<p>I know, past performance is not an indicator of future outcomes, but when talking <i>odds</i>, surely decades worth of data showing historical returns in a similar range, the odds in this case would be skewed towards preferring a continuation of that trend.
What if (hypothetically) a large majority of investors started investing into index funds? For example, an enormous amount of retail investors are won over by this bet and believe passive investment in index funds will always lead to higher returns. Are there any ramifications of this situation that may cause inefficiencies where investing in hedge funds may lead to better returns over a period of decades? Should we all just dump our money into SPY and VTI now that Warren Buffett has won this bet? Or maybe Ted was just unlucky to take this bet during successive rounds of QE that pushed interest rates to historic lows and perhaps artificially turned more risky assets into the only vehicles for returns?
OP made a sucker's bet for two reasons:
1. Fees, which he doesn't mention this write up
2. Hedging, which drags performance in up market years. Markets tend to move up over time, so the longer the outlook, the more likely he is to lose.
I think it's important to note that Ted's bet was in fund of funds, which require additional fees that would negatively effect his investment return regardless of its performance.
This bet remains the worst possible framing of a question "can hedge funds provide value?".<p>Some do, more don't. Active investing is negative sum so unless you've got some pretty good reasons to believe that the specific active manager [fund] has a market beating methodology then you should not be touching them.<p>Investing in a basically un-curated basket of hedge funds is a bad idea full stop and it was crazy to take the other side.