> Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe the active investors must do about average as well.<p>Am I missing something or is this obviously wrong as a mathematical argument? There could be a group of active investors who do well, a group of passive investors who do poorly, and the average would be in the middle.
A better bet is, "will the hedge fund have a profitable year in which the market overall is down". If you invest in the market as a whole, you need to be prepared to be in for 30+ years, especially with the levels of volatility we have seen in the last 10-20 years.<p>A hedge fund can make trades that don't depend on the direction of the market, which means you can access your invested capital even in a down year. Buying an index fund doesn't afford you that opportunity -- if you bought the S&P500 index before the whole mortgage meltdown, you would be out a lot of money now. In 30 years, you probably will have made your 10% per year, though.<p>(One thing to note, though, is that as an average investor, the trades that make hedge funds / investment banks a lot of money are really not available to you. To make any non-directional money these days, you need cheap capital, and nobody's going to give that to you. I know what sorts of trades pay my salary at an investment bank, and if I made them myself, I would lose money. That's the reality.)
This article: <a href="http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.fortune/index.htm" rel="nofollow">http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet....</a>
provides more information.<p>Previously, I thought that it was a sure thing for Buffett to win, because I thought portfolio implied maybe 20+ hedge funds, but standing opposite S&P500 are only 5 hedge funds(preapproved by both Buffett and Protege).<p>Protege has a chance (if i was a betting man, I'd give 1:5 odds they would win).<p>However, Buffett's bet was smarter, because it also wins if something negative happens to the hedge fund industry as a whole politically and we can see that happening already. Nobody is going to nerf S&P 500.<p>Also from the article, each side contributed 320k and put the money into zero coupon bonds with maturity in 10 years(ie 640k now -> 1mil in ten years), which will go to winner's charity.