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No, his bet is that these products which provide exposure to hedge funds for retail investors are not worth it. If he wanted to bet against hedge funds in gener

No, his bet is that these products which provide exposure to hedge funds for retail investors are not worth it. If he wanted to bet against hedge funds in general, then the bet would have been constructed like that (i.e. average performance of funds which aim to beat the market). > * It's reasonable to be skeptical about any fund having a goal that's anything other then maximizing long-term returns. I really don't think it is. If I'm a sophisticated investor, I may want to invest in funds which hedge against tail-risk, or provide broad exposure to some specific sector, etc. Neither of these things are about maximising returns relative to the S&P500. There are strategies with negative expected returns in the long-run, but when added to a portfolio can improve its returns. Portfolio construction can get very complex.

CapriciousCptl 6y ago
Well, no. From Warren himself: "I made the bet... (2) to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be." [1] https://www.berkshirehathaway.com/letters/2017ltr.pdf https://www.berkshirehathaway.com/letters/2017ltr.pdf. And, regarding being skeptical of things like "hedging risks" and "complex portfolios," I don't know. I'm just not sure enough hedge funds really do a great job handling tail risks to not be skeptical of all of them as a group. And, surely sophisticated investors can target specific sectors and build arbitrarily complex portfolios (if they're into that sort of thing) with passive things like ETFs for much lower fees on their own.
- bidirectional 6y ago
  That's clearly not a bet against hedge funds, but 'investment professionals', which in this case are these people offering pooled funds to the retail market. I agree with it and I'm sure many people in the hedge fund industry would agree with it. I'm not talking about all hedge funds managing tail risk for their own portfolios, but funds which are designed to do nothing but hedge against tail risk. They provide a valuable service, and a small allocation to such a fund in concert with a large holding in the S&P500 will often outperform the S&P500, even if the fund itself loses money.
  - asdfasgasdgasdg 6y ago
    > That's clearly not a bet against hedge funds, This isn't clear to me. To me it seems rather that this is a bet against hedge funds. I can see a way to your interpretation but it does not seem as likely to me.
ckastner 6y ago
> If he wanted to bet against hedge funds in general, then the bet would have been constructed like that (i.e. average performance of funds which aim to beat the market). Quoting the shareholder's letter from 2016 [1], the actual bet was "that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. [...] For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund." [1] https://www.berkshirehathaway.com/letters/2016ltr.pdf https://www.berkshirehathaway.com/letters/2016ltr.pdf
richardw 6y ago
> If I'm a sophisticated investor, I may want to invest in funds which hedge against tail-risk Do tail-risk-targeting hedge funds have a better incentive than 2-and-20? Honest question, I have no idea. I assume 2-and-20 drives shooting for the moon and closing the fund if it doesn’t work out.

CapriciousCptl 6y ago

Well, no. From Warren himself: "I made the bet... (2) to publicize my conviction that my pick – a virtually cost-free investment in an unmanaged S&P 500 index fund – would, over time, deliver better results than those achieved by most investment professionals, however well-regarded and incentivized those “helpers” may be." [1] https://www.berkshirehathaway.com/letters/2017ltr.pdf https://www.berkshirehathaway.com/letters/2017ltr.pdf. And, regarding being skeptical of things like "hedging risks" and "complex portfolios," I don't know. I'm just not sure enough hedge funds really do a great job handling tail risks to not be skeptical of all of them as a group. And, surely sophisticated investors can target specific sectors and build arbitrarily complex portfolios (if they're into that sort of thing) with passive things like ETFs for much lower fees on their own.

bidirectional 6y ago
That's clearly not a bet against hedge funds, but 'investment professionals', which in this case are these people offering pooled funds to the retail market. I agree with it and I'm sure many people in the hedge fund industry would agree with it. I'm not talking about all hedge funds managing tail risk for their own portfolios, but funds which are designed to do nothing but hedge against tail risk. They provide a valuable service, and a small allocation to such a fund in concert with a large holding in the S&P500 will often outperform the S&P500, even if the fund itself loses money.
- asdfasgasdgasdg 6y ago
  > That's clearly not a bet against hedge funds, This isn't clear to me. To me it seems rather that this is a bet against hedge funds. I can see a way to your interpretation but it does not seem as likely to me.

ckastner 6y ago

> If he wanted to bet against hedge funds in general, then the bet would have been constructed like that (i.e. average performance of funds which aim to beat the market). Quoting the shareholder's letter from 2016 [1], the actual bet was "that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. [...] For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund." [1] https://www.berkshirehathaway.com/letters/2016ltr.pdf https://www.berkshirehathaway.com/letters/2016ltr.pdf

richardw 6y ago

> If I'm a sophisticated investor, I may want to invest in funds which hedge against tail-risk Do tail-risk-targeting hedge funds have a better incentive than 2-and-20? Honest question, I have no idea. I assume 2-and-20 drives shooting for the moon and closing the fund if it doesn’t work out.