20 Second Advisor: $1M bet (Why hedge funds lose to Warren Buffett)

A hedge fund investor, Ted Seides, made a $1M bet with Warren Buffett 10 years ago that the S&P 500 wouldn’t outperform a group of hedge funds.  The bet was recently settled – Seides lost.  The bet proceeds were paid to Girls, Inc. (Buffett’s chosen charity).

Although Buffett has made his legacy as a stock picker, he understands that the odds are stacked against him.  He has repeatedly advised that most investors should hold a broad basket of diversified securities.  He’s advised that investors shouldn’t pay too much for holding those investments (avoid high cost funds).  The hedge fund industry is exactly the opposite.  Hedge funds are known for taking concentrated risks and charging high fees to warrant their “sophisticated” strategies.  Buffett knows that, on average, if you group hedge funds together, they can’t really outperform the market.  In fact, you’d expect them to lag the market by the expense ratios that they charge.

So, next time you hear someone talking about a fancy hedge fund they are invested in – don’t be envious.  The odds are stacked against them.

Read more about the “Buffett Bet” and lessons learned from it here on the Advisor Perspectives website.


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