Buffett's bet: Hedge funds can't beat the market

Interesting that Warrren Buffet should make this bet. He, of all people, should know that extraordinary managers are able to produce extraordinary returns (1.5x to 2x the average?) over time. I think this is reflected in the fact that he only figures he has a 60% chance of winning. It seems he is hanging the bet on the extraordinary <i>fees</i> that hedge funds claim, and hence saying that they <i>would</i> do better over time - just not after the fees.<p>This is a worthwhile addition to the debate of index funds vs. the best of actively managed funds - most participants in this debate are awfully black-and-white. I have seen several critics practically say that there is no such thing as a better-than-average investor - just a normalized distribution of investor luck.<p>Hasn't anybody done a survey on this? It shouldn't be too hard to determine with statistics whether the world's top investors are better than or on par with the expected variance in luck. I strongly favor the position that a good investor <i>can</i> beat the market over time..with the caveat that it takes 10 or 20 years to determine who these investors are.

take a list of 1 million people. tell half that a particular stock will go up and half that a particular stock will go down. discard the 500,000 that you were wrong to and do it again, tell 250,000 that a particular stock will go up and the other half that it will go down. Repeat a few times until you have only a few thousand people left whom think you have been right 7 or 8 times in a row. Tell them you are a stock guru and will teach them your system for $10,000. Profit.

One of the alleged selling points of a hedge fund is that their short-selling makes them outperform during market downturns. So it's a little odd that Buffett stipulated just returns, rather than returns adjusted for some measure of risk (if I had something that returned .5% less than the market on days when market was doing better than average, and .5% more than the market when it did worse than average, this would be a better thing to own than just a market index, even though it gets exactly the same average return -- because it's giving me extra money right when I'd want to buy other things, in exchange for giving me less money at times when I'd prefer to sell).

while its true that index funds will usually beat out managed funds, its tough to put in such a hard constraint, in this case, of 10 years. it really depends on the business cycles and depths/peaks of the recessions and booms.<p>i kind of feel like this contest is more of a coin flip and will <i>mostly</i> only benefit the hedge fund people.

My bet: Buffet and hedge fund managers make lots of money.

"Buffett" is a brand name for financial media. This is a meaningless ploy to sell more Buffet-branded media, and it doesn't merit any rigorous scrutiny.

I used to like Warren. That was until he got so chummy with Bill Gates. Now I won't even watch Fox News anymore.