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Buffet's wager is a trick, which works on simple people who don't understand statistics. When you take a group of hedge funds, they end up being a very good pr

by jamez1 10y ago

Buffet's wager is a trick, which works on simple people who don't understand statistics. When you take a group of hedge funds, they end up being a very good proxy for the market. At about 20, they will be almost indiscernible. So - a passive fund, buying the market, with lower fees, should outperform.

mortehu 10y ago
The Protégé basket of funds contains five hedge funds, not twenty. The returns are far from indiscernible from S&P 500. At the end of 2015, the S&P 500 portfolio had seen 3x the profits of the Protégé portfolio.
- jamez1 10y ago
  In his case, these were 5 funds of hedge funds. Which underneath could be much more than 20 funds. You're also forgetting how much the compounding of the fees can cost, and you have two layers of them. This could easily make the S&P at least 3x higher in returns after 10 years.
  - mortehu 10y ago
    Aha, I had skimmed past the fund of fund parts. In CFA Institute's estimate, the difference in fees only made up about half of the underperformance at the end of 2014, especially considering that 2008 was an easy win for hedge funds: https://blogs.cfainstitute.org/investor/2015/02/12/betting-with-buffett-seven-lean-years-later/ https://blogs.cfainstitute.org/investor/2015/02/12/betting-w... Note that at the end of 2015, eight years had elapsed, not ten.
    - jamez1 10y ago
      Fair enough, there is a slight bit more to the buffet bet than I trivialized. The short portion of the hedge fund will have been losing as we are in a bull market. The full length of a cycle should see this effect reverse (and indeed 2008 shows this). So Buffet did have to pick a bull market in making this bet, but he still had better than 50/50 odds regardless. You also have other costs specific to hedge funds over active funds, such as higher brokerage from more frequent trades, and short interest. These have the same drag as the management fees, and I should have included that also in the description.

by jamez1 10y ago

mortehu 10y ago

The Protégé basket of funds contains five hedge funds, not twenty. The returns are far from indiscernible from S&P 500. At the end of 2015, the S&P 500 portfolio had seen 3x the profits of the Protégé portfolio.

jamez1 10y ago
In his case, these were 5 funds of hedge funds. Which underneath could be much more than 20 funds. You're also forgetting how much the compounding of the fees can cost, and you have two layers of them. This could easily make the S&P at least 3x higher in returns after 10 years.
- mortehu 10y ago
  Aha, I had skimmed past the fund of fund parts. In CFA Institute's estimate, the difference in fees only made up about half of the underperformance at the end of 2014, especially considering that 2008 was an easy win for hedge funds: https://blogs.cfainstitute.org/investor/2015/02/12/betting-with-buffett-seven-lean-years-later/ https://blogs.cfainstitute.org/investor/2015/02/12/betting-w... Note that at the end of 2015, eight years had elapsed, not ten.
  - jamez1 10y ago
    Fair enough, there is a slight bit more to the buffet bet than I trivialized. The short portion of the hedge fund will have been losing as we are in a bull market. The full length of a cycle should see this effect reverse (and indeed 2008 shows this). So Buffet did have to pick a bull market in making this bet, but he still had better than 50/50 odds regardless. You also have other costs specific to hedge funds over active funds, such as higher brokerage from more frequent trades, and short interest. These have the same drag as the management fees, and I should have included that also in the description.