15 ms·

Buffett once bet $1M that he could beat a group of hedge funds over 10 years

128 points by hhs 3y ago

hankchinaski 3y ago
If you look at the spiva scorecard report 92% of hedge funds underperformed the sp500 - so the bet would essentially be a coin toss with 92/8 percent probability split
- hhs 3y ago
  If anyone is interested, this is over a period of 15 years: https://www.spglobal.com/spdji/en/research-insights/spiva/ https://www.spglobal.com/spdji/en/research-insights/spiva/
- swyx 3y ago
  as a former hedge funder i feel compelled to point out that the goal of most modern hedge funds is to provide uncorrelated alpha - not absolute outperformance. This is because it is trivial to size up/down sp500 beta - if you are a sophisticated financial institution, you have access to futures and other instruments to have as much exposure as you want, no hedge funds needed. so take 20% of your $ and put it in a 5x levered index exposure for 100% sp500, then allocate the 80% of the rest to low beta alternatives, for a very very simplified example. comparing HF alpha to SP500 beta is literally apples and oranges. but at this point ive lost most of the general public's attention.
  - matsemann 3y ago
    The problem is all the actively managed funds that promise to retail investors that they will outperform, while costing lots in fees. Normal people don't need hedged funds.
  - fdsjvkalljj 3y ago
    Buffett's response would be that the general ideas underpinning that thinking of "alpha," "beta" and modern portfolio theory are bunk.
  - misja111 3y ago
    if this were the case, then you'd expect these modern uncorrelated funds to outperform the sp500 in times when the market went down, right? However this is not the case, the sp500 also outperformed most funds in e.g. 2020. See e.g. https://www.reddit.com/r/dataisbeautiful/comments/10lpczg/oc_average_hedge_fund_vs_sp_500_annual_return/ https://www.reddit.com/r/dataisbeautiful/comments/10lpczg/oc...
    - bombcar 3y ago
      The purpose of a hedge fund should be to hedge a specific risk. But those hedge funds are not advertised, the ones advertised are the ones being sold.
    - swyx 3y ago
      > outperform the sp500 in times when the market went down your chart shows the market going up in 2020. but look im not saying ALL or even MOST hedge funds reach their goal. usually the average hedge fund underperforms given its a ~zero sum game. just objecting to the popular way of comparing things. you dont judge a fish by its ability to climb trees.
- verbify 3y ago
  If I recall correctly, the bet terms were a collection of hedge funds, which changes the odds - was what are the chances that if you pick 5 balls out of a bag containing 92 red balls and 8 blue balls that the majority of your balls will be blue? Much much less than 8%.
  - verbify 3y ago
    Closer to 0.32% than 8%.
varelse 3y ago
[dead]
nabla9 3y ago
Misleading hedline. Buffet bet $1M that S&P 500 ETF (VOO) index fund would beat hedge fund portfolio selected by Ted Seides. Low cost index funds performing generally better is well documented. Buffet's bet is common sense. Reasons why: - lower cost is important over longer term. - Well diversified index fund picks every success, unlike actively managed portfolio.
- epolanski 3y ago
  Point two is double edged, it also picks all losers.
  - WrongAssumption 3y ago
    Sure, but the losers go down between 1-100%, while winners are virtually uncapped.
    - eru 3y ago
      It's a pretty common strategy to sell covered calls on your portfolio. That caps your upside from infinite to finite. But you collect a steady stream of option premiums. The result doesn't look all that different on average from just investing in the plain index fund. You just get a different risk distribution. (Similarly, you can invest in an index fund that tracks (junk) bonds. Upside is finite there as well.)
  - FullyFunctional 3y ago
    As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns completely to dust, if that one is outstanding it makes up for it all. We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market. [1] This is not an endorsement; my personal experience with their pool was mediocre at best.
    - 3y ago
bhpm 3y ago
Buffett’s million dollar bet was made on Long Bets, the accountability mechanism operated by Long Now Foundation. The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering a opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.) [0]https://longnow.org/ideas/the-million-dollar-long-bet/ https://longnow.org/ideas/the-million-dollar-long-bet/
- jefftk 3y ago
  I like the idea of Long Bets, though their fee is much higher than it looks: https://www.jefftk.com/p/long-bets-by-confidence-level https://www.jefftk.com/p/long-bets-by-confidence-level I've recently gotten into Manifold (https://manifold.markets https://manifold.markets) which I think is generally a better home for this sort of thing: you get the views of many more people, essentially weighted by how well they've previously done.
  - naniwaduni 3y ago
    If you're using Long Bets as your betting platform, you are presumably comfortable with both (a) the Long Now Foundation and (b) donating to charity. It's not that huge of a stretch for you to be comfortable diverting a bit under half your donation to LNF. Presumably the people making these bets should be sophisticated enough to understand this implication, though reporting on them can be ... iffy.
    - jefftk 3y ago
      You can be comfortable with donating to charity but also have strong opinions on which charities you want to support. The confusing bit is that it's presented as half of the income, where unless you spend some time looking at the math it's probably not obvious that for longer timescales this ends up being close half of the total.
      - naniwaduni 3y ago
Lucasoato 3y ago
> Buffett’s Big Bet is by far the largest bet on Long Bets. The previous largest Long Bet was one for $20,000 between Mitch Kapor and Ray Kurzweil. The two prominent thinkers were betting whether an AI would pass the Turing Test by 2029. Ray was certain an AI would pass muster by then and Kapor was sure it would not get close. (Incidentally, Kapor told me recently he’s willing to double, triple, or quadruple the bet with Ray, or anyone else betting on an AI by 2029.) Can we say that ChatGPT passes the Turing test?
- paxys 3y ago
  If the question was about AGI or sentience or whatever else then we could debate it endlessly, but there is no doubt that the Turing Test was solved by computers well before ChatGPT was even a thing. Although that says more about the shortcomings of the test itself rather than the capabilities of AI.
  - marcusverus 3y ago
    You can say the test was imperfectly designed, but pointless? No. The point of the test was to provide an objective measuring stick by which we might define the moment of arrival of machine thinking. As Turing observed, a question like “Can machines think” is painfully subjective and thus is a poor measuring stick. Hence the need for the test.
  - bnralt 3y ago
    I remember pretty rudimentary Chatbots from decades ago that were able to fool someone unfamiliar with them for at least a few minutes. I've even known people who did gag answering messages that were able to fool people into thinking they were talking to a real person - not for long, mind you, but for a surprising amount of time. It's always seemed a pretty bad basis for deciding intelligence.
- nyokodo 3y ago
  > Can we say that ChatGPT passes the Turing test? For all intents and purposes I would say yes, under the rules of the bet[1] I’m not so sure. 1. https://longbets.org/1/ https://longbets.org/1/
NaOH 3y ago
Related: Buffett pulls ahead in wager against hedge funds - https://news.ycombinator.com/item?id=5134337 https://news.ycombinator.com/item?id=5134337 - January 2013, 27 comments Ted Seides Concedes Bet with Warren Buffett - https://news.ycombinator.com/item?id=14257847 https://news.ycombinator.com/item?id=14257847 - May 2017, 130 comments Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds - https://news.ycombinator.com/item?id=15268726 https://news.ycombinator.com/item?id=15268726 - September 2017, 316 comments Warren Buffett's bet against hedge funds at the Long Now Foundation (2008-17) - https://news.ycombinator.com/item?id=26294386 https://news.ycombinator.com/item?id=26294386 - February 2021, 131 comments
mathgradthrow 3y ago
Of course they do, hedge fund are about convincing rich people to pay you to invest your money in index funds. the more mathematicians on payroll the better.
- ProjectArcturis 3y ago
  Well, that, but they also offer diversification. In general they will return lower average gains than the stock market, but they are often uncorrelated with it. Adding them to a portfolio can raise its Sharpe ratio (mean return divided by standard deviation of returns).
  - deleted 3y ago
    [deleted]
  - rTX5CMRXIfFG 3y ago
    The Sharpe numerator is excess return, not mean return. Can you also explain why a hedge fund portfolio would increase your portfolio’s Sharpe ratio? Already with the returns in the article it’s less than S&P500 so it’s likely somewhere below the CML as the efficient frontier.
    - ProjectArcturis 3y ago
      Okay, the risk-free rate had been zero for so long that excess return was essentially equal to mean return. That nit picked, the addition of any source of return greater than the risk-free rate, if uncorrelated to the rest of the portfolio, will improve Sharpe. If the return is small, then the optimal allocation is small as well, but still nonzero. In CML terms, the existence of hedge funds as uncorrelated strategies changes the shape of the CML curve.
    - swexbe 3y ago
      A low covariance with the rest of the portfolio will lower the denominator. As long as E(r) is higher than r_f, it’s possible to end up with a higher sharpe. Obv just leverage if you want a higher expected return.
dehrmann 3y ago
Hedge funds have their problems as investments, and what they do varies wildly, so I suspect Buffett is generally right, but he got really lucky with the timing of this bet. He made it right before a regime change with low interest rates that pretty much lifted all boats, especially large cap ones.
- ProjectArcturis 3y ago
  You're saying he was lucky to start a bet in 2007 that stocks would go up?
  - dehrmann 3y ago
    It was a bit of a lost decade for hedge funds. https://www.ft.com/__origami/service/image/v2/images/raw/ftcms%3A6e99f4f8-1398-11e9-a581-4ff78404524e?source=next-article&fit=scale-down&quality=highest&width=700&dpr=2 https://www.ft.com/__origami/service/image/v2/images/raw/ftc...
    - ProjectArcturis 3y ago
      ... it was also when stocks had their greatest crash since the Depression?
- nosefurhairdo 3y ago
  > From January 1994 to June 2023—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.8 percentage points in annualized return. https://www.investopedia.com/articles/03/121003.asp https://www.investopedia.com/articles/03/121003.asp Buffet didn't get "really lucky." The likelihood of a hedge fund beating the S&P 500 over a 10 year period is quite low. He would've been really unlucky to lose that bet.
robertwt7 3y ago
I'm not a banker, economist, or active investor. All of the advices I have received even from most economist are going on long investment and diversify using index fund. Most even comes up with charts of how it significantly outperform hedge funds, private market investments, and other things. It makes me wonder, why are rich people still investing in hedge funds? how are they still getting clients given all the data saying that most index fund outperform hedge funds?
- reducesuffering 3y ago
  Almost all big university endowments follow the Yale Model[0] as they want asset diversification from the large allocation to market beta (total market index fund) and bonds. Most of the VC $ that funds startup salaries comes from people trying to diversify into other assets outside of the total US market. [0] https://en.wikipedia.org/wiki/David_F._Swensen https://en.wikipedia.org/wiki/David_F._Swensen
- jackcosgrove 3y ago
  There is a theoretical limit to index fund adoption where the index becomes zombified and price discovery stops happening. I think we're a long way from that point. There are reasons to not invest in index funds (why does anyone invest in bonds?) that have to do with the purpose of the investment not being to maximize return. That said I think there's still a lot of ignorance and gambling going on, which is why the zombie index has yet to rise from the grave.
  - missedthecue 3y ago
    At what % (of the stock market being owned by index funds) do you think this will occur?
    - jackcosgrove 3y ago
      I have no idea. I think we're far from that because the spread between passive investing and active management is still in favor of passive investing.
jackcosgrove 3y ago
IANAMM (market mover) but my understanding of hedge funds is that their purpose is principal preservation not growth. When you have a billion dollars to invest, your investments begin to distort markets. Small investors benefit most from the index fund strategy, but it doesn't work as well for institutional investors and wealthy family offices. Now, I'm sure there are a lot of hedge funds who promise market-beating returns to less savvy investors, who are just cashing in on to the cachet of the industry.
- benjaminwootton 3y ago
  Different funds will have different mandates, but generally they are trying to beat their benchmark index and charge 2 & 20 for the privilege. If they can't beat the S&P 500 which I can invest in with Vanguard at 0.07% at relatively low risk, then why would you invest with them?
  - jackcosgrove 3y ago
    As a retail investor you should not invest in hedge funds.
  - edgyquant 3y ago
    The main point of a hedge fund is in the name, to act as a hedge. They aren’t, as a rule, meant to be a competitor of SPY.
    - n2d4 3y ago
      That's not where the "hedge" comes from, it's called that because they use hedging and other strategies to (hopefully) deliver constantly positive returns, uncorrelated to the market. (Which ironically makes it useless as a hedge, as those should be anti-correlated.)
      - bionsystem 3y ago
        Absolutely. The real original term was "hedged fund" and not "hedge fund". I can only feel the pain of the guy [0] who invented the term, when he saw that his entire industry dumbed it down. [0] https://en.wikipedia.org/wiki/Alfred_Winslow_Jones https://en.wikipedia.org/wiki/Alfred_Winslow_Jones
ThrowAway1453 3y ago
I wonder if Buffett could beat proprietary shops like Jane Street, or even super elite algorithmic funds like Renaissance, Millennium Fund, or TGS. There's still alpha to be had.
- lsiq 3y ago
  Buffett knows the S&P always wins because seignorage ends up in the S&P....
- FredPret 3y ago
  Some of those stay small, because if they grew large they would distort the market and invalidate their strategies. So it's not really a way to compound a large (Buffett-sized) fortune. He handily beats almost everyone for total amount of dollars gained per year, if not percentage-wise.
helsinkiandrew 3y ago
Looking at the S&P chart since the 1920's there have been several decade periods where he would have lost the bet. The increase in the past 20 years has coincided with ever lower interest rates - which may have ended. https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
- bravura 3y ago
  Just curious, would you have to adjust the values for inflation with these numbers? i.e. to compute the percent of starting years for which 10 years of holding the S&P 500 would underperform 36.3% (the average of the 5 hedge fund-of-funds)?
- DeathArrow 3y ago
  What if hedge funds would lose even more in those periods?
- jjice 3y ago
  For a 10 year bet, that's a fair point. Tangentially, over the course of an individual investor's working years, I think this shows that the S&P 500 is pretty good, if paired with appropriate bond allocation as your move towards retirement.
- raphaelj 3y ago
  Your graph does not show the real return of the SP500, as it does not include dividends.
quartesixte 3y ago
I've probably said this before on HN, but something that tickles me about this entire story is that Buffett himself did not get to where he is by just holding the SP500. But yet this story gets trotted out at the water cooler every once in a while as if this is the source of his wealth, and that it'd behoove us to do the same. Except Buffett and Munger made their money on picking individual stocks and making WSB-style-yolo-bets on them. Or doing classic acquisition/PE stuff (Geico, See's, etc). The other thing that always catches me off guard about this story (as a late millennial) is how Index/ETF investing was not a common thing when this bet was made! Which is crazy to me but all this advice that media (traditional and social alike) that is made to seem timeless was not a clear-cut obvious answer in the early 2000s. Which makes sense when you consider the fact that these ETFs are actually fairly recent phenomenons.
- dmoy 3y ago
  ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people
  - pests 3y ago
    > SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?
    - dmoy 3y ago
      Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
jnsaff2 3y ago
Just today a friend shared whats below. I have no claim that it is true or verified. "After Bill Gates became friends with Warren Buffett, he began to diversify his portfolio and sold Microsoft shares. Bill Gates' fortune today is 138 billion dollars, if he hadn't diversified it would be 1.33 trillion dollars. Be careful with diversification and with friends who recommend it." EDIT: there is at least one source https://finance.yahoo.com/news/bill-gates-could-trillionaire-today-163852659.html https://finance.yahoo.com/news/bill-gates-could-trillionaire...
- majani 3y ago
  On the other hand Munger said that diversification is for those who don't know what they're doing. So maybe Gates wanted to stock pick and Buffet talked him into diversifying safely
- OJFord 3y ago
  Ok, now imagine a concentrated holding by founder of something like WeWork, or a fallen giant of yesteryear (especially wrt inflation / opportunity cost by comparison to some broad index). For every formerly concentrated investor who would've done well to stay concentrated, there's tonnes who did and shouldn't have, or didn't and would've suffered if they had.
- episteme 3y ago
  It still could have been the best decision at the time. Imagine you bet on a coin flip landing heads. After it's flipped and lands heads it's not useful to say you should have bet your net worth on it.
- graton 3y ago
  Tell that to the Enron employees who had all of their retirement 401k in Enron stock. Yes of course if someone is able to pick the exact stocks that will go up the most then they will do wonderful. The problem is that it is impossible to know which stocks are going to succeed or fail. Also the Bill & Melinda Gates foundation is estimated to be worth $69 billion. And probably most of that has come from Bill Gates.
tacocataco 3y ago
Money would be a fun game if it didn't have real world consequences.
DeathArrow 3y ago
Renaissance Technologies and other small funds constantly beats index funds. So it depends on the hedge funds.
SilverBirch 3y ago
Sorry what has happened to Yahoo Finance? First - Buffett didn't be that he could beat Hedge Funds, he bet that the S&P will beat hedge funds - he was basically making the opposite argument that the headline implies. He was betting the fees and inefficiencies of Hedge Funds meant they wouldn't beat the market. Not that Buffett personally could outperform them. Then one sentence into the article they start trying to shill dodgy commercial real estate investment strategies. Can we just take a moment to consider the balls you have to have to insert that suggestion into this article about what Buffett is saying. I'm fairly sure the message Buffett was trying to push wasn't "Hedge funds are bad you should go and put your money into highly suspicious alternative investment schemes".
chx 3y ago
https://www.wealthfront.com/blog/illusion-stock-picking-skill/ https://www.wealthfront.com/blog/illusion-stock-picking-skil... > most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell? > the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. > the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not
YesThatTom2 3y ago
Buffet’s point was the people that make money in hedge funds are the managers, not the investors! I live 15 miles west of Wall Street in a suburb called Montclair, NJ. There’s a neighbor of fancy mansions locally known as “hedgefund manager row”. It ain’t called “hedgefund investor row” for a reason!
- Galanwe 3y ago
  Hedge fund clients are mainly institutionals, not individuals, you obviously won't find "Oklahoma Pension Fund's Mansion". Also, most hedge funds have either a "pass through costs /performance fees", or "management/performance fees" (generally at 2/20%). Meaning they earn money on the absolute returns they make for their clients. But if you want to believe that the world is dumb and hedge fund managers earn money through clueless clients, sure. You might also want to checkout the arguments of flat earthers, it's in the same vein.
dxs 3y ago
Principles: (1) asset allocation (2) diversification (3) rebalancing Investments: no-load index mutual funds/etfs (1) total US stock market index (2) total US bond market index (3) total world stock market index, excluding US Prime resource: Bogleheads.org – Investing advice inspired by John Bogle (1) www.bogleheads.org (2) www.bogleheads.org/wiki/Main_Page
- raccoonDivider 3y ago
  Do you still expect that to work now that the decade of low interest rates is over? Shouldn't people buy individual bonds instead?
  - bombcar 3y ago
    The answer depends on what you are doing, why you are doing it, whether you are in a tax advantaged account, and how you need the money. All of those affect what you should do and what is optimal. https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_f... Reasons for a fund may include ease of management, variations in contributions and times, uncertainty of when the need, and ease of rebalancing. Individual bonds may be more appropriate for a defined liability at a specific time, for a bond ladder, or as a tax minimization strategy.
  - misja111 3y ago
    Who says it's over? The current US fed rate is only at its 50 year historical average now, and most investors expect the fed to considerably lower its rates again this year.
  - 2OEH8eoCRo0 3y ago
    Stay the course! https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
- sodality2 3y ago
  Just started reading Bogleheads’ Guide to Investing, quite a good read so far. It’s very informative about how the investing/trading industry relies on regular people giving up their gains on fees, loaded funds, etc when a simple investment plan like above is incredibly low risk.
thecookielab 3y ago
Hedge funds hedge. News at 11.
black_13 3y ago
[dead]

128 points by hhs 3y ago

If you look at the spiva scorecard report 92% of hedge funds underperformed the sp500 - so the bet would essentially be a coin toss with 92/8 percent probability split

hhs 3y ago
If anyone is interested, this is over a period of 15 years: https://www.spglobal.com/spdji/en/research-insights/spiva/ https://www.spglobal.com/spdji/en/research-insights/spiva/
swyx 3y ago
as a former hedge funder i feel compelled to point out that the goal of most modern hedge funds is to provide uncorrelated alpha - not absolute outperformance. This is because it is trivial to size up/down sp500 beta - if you are a sophisticated financial institution, you have access to futures and other instruments to have as much exposure as you want, no hedge funds needed. so take 20% of your $ and put it in a 5x levered index exposure for 100% sp500, then allocate the 80% of the rest to low beta alternatives, for a very very simplified example. comparing HF alpha to SP500 beta is literally apples and oranges. but at this point ive lost most of the general public's attention.
- matsemann 3y ago
  The problem is all the actively managed funds that promise to retail investors that they will outperform, while costing lots in fees. Normal people don't need hedged funds.
- fdsjvkalljj 3y ago
  Buffett's response would be that the general ideas underpinning that thinking of "alpha," "beta" and modern portfolio theory are bunk.
- misja111 3y ago
  if this were the case, then you'd expect these modern uncorrelated funds to outperform the sp500 in times when the market went down, right? However this is not the case, the sp500 also outperformed most funds in e.g. 2020. See e.g. https://www.reddit.com/r/dataisbeautiful/comments/10lpczg/oc_average_hedge_fund_vs_sp_500_annual_return/ https://www.reddit.com/r/dataisbeautiful/comments/10lpczg/oc...
  - bombcar 3y ago
    The purpose of a hedge fund should be to hedge a specific risk. But those hedge funds are not advertised, the ones advertised are the ones being sold.
  - swyx 3y ago
    > outperform the sp500 in times when the market went down your chart shows the market going up in 2020. but look im not saying ALL or even MOST hedge funds reach their goal. usually the average hedge fund underperforms given its a ~zero sum game. just objecting to the popular way of comparing things. you dont judge a fish by its ability to climb trees.
verbify 3y ago
If I recall correctly, the bet terms were a collection of hedge funds, which changes the odds - was what are the chances that if you pick 5 balls out of a bag containing 92 red balls and 8 blue balls that the majority of your balls will be blue? Much much less than 8%.
- verbify 3y ago
  Closer to 0.32% than 8%.

varelse 3y ago

[dead]

nabla9 3y ago

Misleading hedline. Buffet bet $1M that S&P 500 ETF (VOO) index fund would beat hedge fund portfolio selected by Ted Seides. Low cost index funds performing generally better is well documented. Buffet's bet is common sense. Reasons why: - lower cost is important over longer term. - Well diversified index fund picks every success, unlike actively managed portfolio.

epolanski 3y ago
Point two is double edged, it also picks all losers.
- WrongAssumption 3y ago
  Sure, but the losers go down between 1-100%, while winners are virtually uncapped.
  - eru 3y ago
    It's a pretty common strategy to sell covered calls on your portfolio. That caps your upside from infinite to finite. But you collect a steady stream of option premiums. The result doesn't look all that different on average from just investing in the plain index fund. You just get a different risk distribution. (Similarly, you can invest in an index fund that tracks (junk) bonds. Upside is finite there as well.)
- FullyFunctional 3y ago
  As Motley Fools [1] like to point out, the most you can loose is 100% whereas the upside is unbounded. This means that even if all but one investment turns completely to dust, if that one is outstanding it makes up for it all. We are actually in that situation now where the gains of S&P 500 relies completely on the top handful of companies and as much as (IIRC) 70% of the companies in S&P 500 are lagging the market. [1] This is not an endorsement; my personal experience with their pool was mediocre at best.
  - 3y ago

bhpm 3y ago

Buffett’s million dollar bet was made on Long Bets, the accountability mechanism operated by Long Now Foundation. The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering a opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.) [0]https://longnow.org/ideas/the-million-dollar-long-bet/ https://longnow.org/ideas/the-million-dollar-long-bet/

jefftk 3y ago
I like the idea of Long Bets, though their fee is much higher than it looks: https://www.jefftk.com/p/long-bets-by-confidence-level https://www.jefftk.com/p/long-bets-by-confidence-level I've recently gotten into Manifold (https://manifold.markets https://manifold.markets) which I think is generally a better home for this sort of thing: you get the views of many more people, essentially weighted by how well they've previously done.
- naniwaduni 3y ago
  If you're using Long Bets as your betting platform, you are presumably comfortable with both (a) the Long Now Foundation and (b) donating to charity. It's not that huge of a stretch for you to be comfortable diverting a bit under half your donation to LNF. Presumably the people making these bets should be sophisticated enough to understand this implication, though reporting on them can be ... iffy.
  - jefftk 3y ago
    You can be comfortable with donating to charity but also have strong opinions on which charities you want to support. The confusing bit is that it's presented as half of the income, where unless you spend some time looking at the math it's probably not obvious that for longer timescales this ends up being close half of the total.
    - naniwaduni 3y ago

Lucasoato 3y ago

> Buffett’s Big Bet is by far the largest bet on Long Bets. The previous largest Long Bet was one for $20,000 between Mitch Kapor and Ray Kurzweil. The two prominent thinkers were betting whether an AI would pass the Turing Test by 2029. Ray was certain an AI would pass muster by then and Kapor was sure it would not get close. (Incidentally, Kapor told me recently he’s willing to double, triple, or quadruple the bet with Ray, or anyone else betting on an AI by 2029.) Can we say that ChatGPT passes the Turing test?

paxys 3y ago
If the question was about AGI or sentience or whatever else then we could debate it endlessly, but there is no doubt that the Turing Test was solved by computers well before ChatGPT was even a thing. Although that says more about the shortcomings of the test itself rather than the capabilities of AI.
- marcusverus 3y ago
  You can say the test was imperfectly designed, but pointless? No. The point of the test was to provide an objective measuring stick by which we might define the moment of arrival of machine thinking. As Turing observed, a question like “Can machines think” is painfully subjective and thus is a poor measuring stick. Hence the need for the test.
- bnralt 3y ago
  I remember pretty rudimentary Chatbots from decades ago that were able to fool someone unfamiliar with them for at least a few minutes. I've even known people who did gag answering messages that were able to fool people into thinking they were talking to a real person - not for long, mind you, but for a surprising amount of time. It's always seemed a pretty bad basis for deciding intelligence.
nyokodo 3y ago
> Can we say that ChatGPT passes the Turing test? For all intents and purposes I would say yes, under the rules of the bet[1] I’m not so sure. 1. https://longbets.org/1/ https://longbets.org/1/

NaOH 3y ago

Related: Buffett pulls ahead in wager against hedge funds - https://news.ycombinator.com/item?id=5134337 https://news.ycombinator.com/item?id=5134337 - January 2013, 27 comments Ted Seides Concedes Bet with Warren Buffett - https://news.ycombinator.com/item?id=14257847 https://news.ycombinator.com/item?id=14257847 - May 2017, 130 comments Buffett wins $1M decade-old bet that the S&P500 would outperform hedgefunds - https://news.ycombinator.com/item?id=15268726 https://news.ycombinator.com/item?id=15268726 - September 2017, 316 comments Warren Buffett's bet against hedge funds at the Long Now Foundation (2008-17) - https://news.ycombinator.com/item?id=26294386 https://news.ycombinator.com/item?id=26294386 - February 2021, 131 comments

mathgradthrow 3y ago

Of course they do, hedge fund are about convincing rich people to pay you to invest your money in index funds. the more mathematicians on payroll the better.

ProjectArcturis 3y ago
Well, that, but they also offer diversification. In general they will return lower average gains than the stock market, but they are often uncorrelated with it. Adding them to a portfolio can raise its Sharpe ratio (mean return divided by standard deviation of returns).
- deleted 3y ago
  [deleted]
- rTX5CMRXIfFG 3y ago
  The Sharpe numerator is excess return, not mean return. Can you also explain why a hedge fund portfolio would increase your portfolio’s Sharpe ratio? Already with the returns in the article it’s less than S&P500 so it’s likely somewhere below the CML as the efficient frontier.
  - ProjectArcturis 3y ago
    Okay, the risk-free rate had been zero for so long that excess return was essentially equal to mean return. That nit picked, the addition of any source of return greater than the risk-free rate, if uncorrelated to the rest of the portfolio, will improve Sharpe. If the return is small, then the optimal allocation is small as well, but still nonzero. In CML terms, the existence of hedge funds as uncorrelated strategies changes the shape of the CML curve.
  - swexbe 3y ago
    A low covariance with the rest of the portfolio will lower the denominator. As long as E(r) is higher than r_f, it’s possible to end up with a higher sharpe. Obv just leverage if you want a higher expected return.

dehrmann 3y ago

Hedge funds have their problems as investments, and what they do varies wildly, so I suspect Buffett is generally right, but he got really lucky with the timing of this bet. He made it right before a regime change with low interest rates that pretty much lifted all boats, especially large cap ones.

ProjectArcturis 3y ago
You're saying he was lucky to start a bet in 2007 that stocks would go up?
- dehrmann 3y ago
  It was a bit of a lost decade for hedge funds. https://www.ft.com/__origami/service/image/v2/images/raw/ftcms%3A6e99f4f8-1398-11e9-a581-4ff78404524e?source=next-article&fit=scale-down&quality=highest&width=700&dpr=2 https://www.ft.com/__origami/service/image/v2/images/raw/ftc...
  - ProjectArcturis 3y ago
    ... it was also when stocks had their greatest crash since the Depression?
nosefurhairdo 3y ago
> From January 1994 to June 2023—through both bull and bear markets—the passive S&P 500 Index outperformed every major hedge fund strategy by over 2.8 percentage points in annualized return. https://www.investopedia.com/articles/03/121003.asp https://www.investopedia.com/articles/03/121003.asp Buffet didn't get "really lucky." The likelihood of a hedge fund beating the S&P 500 over a 10 year period is quite low. He would've been really unlucky to lose that bet.

robertwt7 3y ago

I'm not a banker, economist, or active investor. All of the advices I have received even from most economist are going on long investment and diversify using index fund. Most even comes up with charts of how it significantly outperform hedge funds, private market investments, and other things. It makes me wonder, why are rich people still investing in hedge funds? how are they still getting clients given all the data saying that most index fund outperform hedge funds?

reducesuffering 3y ago
Almost all big university endowments follow the Yale Model[0] as they want asset diversification from the large allocation to market beta (total market index fund) and bonds. Most of the VC $ that funds startup salaries comes from people trying to diversify into other assets outside of the total US market. [0] https://en.wikipedia.org/wiki/David_F._Swensen https://en.wikipedia.org/wiki/David_F._Swensen
jackcosgrove 3y ago
There is a theoretical limit to index fund adoption where the index becomes zombified and price discovery stops happening. I think we're a long way from that point. There are reasons to not invest in index funds (why does anyone invest in bonds?) that have to do with the purpose of the investment not being to maximize return. That said I think there's still a lot of ignorance and gambling going on, which is why the zombie index has yet to rise from the grave.
- missedthecue 3y ago
  At what % (of the stock market being owned by index funds) do you think this will occur?
  - jackcosgrove 3y ago
    I have no idea. I think we're far from that because the spread between passive investing and active management is still in favor of passive investing.

jackcosgrove 3y ago

IANAMM (market mover) but my understanding of hedge funds is that their purpose is principal preservation not growth. When you have a billion dollars to invest, your investments begin to distort markets. Small investors benefit most from the index fund strategy, but it doesn't work as well for institutional investors and wealthy family offices. Now, I'm sure there are a lot of hedge funds who promise market-beating returns to less savvy investors, who are just cashing in on to the cachet of the industry.

benjaminwootton 3y ago
Different funds will have different mandates, but generally they are trying to beat their benchmark index and charge 2 & 20 for the privilege. If they can't beat the S&P 500 which I can invest in with Vanguard at 0.07% at relatively low risk, then why would you invest with them?
- jackcosgrove 3y ago
  As a retail investor you should not invest in hedge funds.
- edgyquant 3y ago
  The main point of a hedge fund is in the name, to act as a hedge. They aren’t, as a rule, meant to be a competitor of SPY.
  - n2d4 3y ago
    That's not where the "hedge" comes from, it's called that because they use hedging and other strategies to (hopefully) deliver constantly positive returns, uncorrelated to the market. (Which ironically makes it useless as a hedge, as those should be anti-correlated.)
    - bionsystem 3y ago
      Absolutely. The real original term was "hedged fund" and not "hedge fund". I can only feel the pain of the guy [0] who invented the term, when he saw that his entire industry dumbed it down. [0] https://en.wikipedia.org/wiki/Alfred_Winslow_Jones https://en.wikipedia.org/wiki/Alfred_Winslow_Jones

ThrowAway1453 3y ago

I wonder if Buffett could beat proprietary shops like Jane Street, or even super elite algorithmic funds like Renaissance, Millennium Fund, or TGS. There's still alpha to be had.

lsiq 3y ago
Buffett knows the S&P always wins because seignorage ends up in the S&P....
FredPret 3y ago
Some of those stay small, because if they grew large they would distort the market and invalidate their strategies. So it's not really a way to compound a large (Buffett-sized) fortune. He handily beats almost everyone for total amount of dollars gained per year, if not percentage-wise.

helsinkiandrew 3y ago

Looking at the S&P chart since the 1920's there have been several decade periods where he would have lost the bet. The increase in the past 20 years has coincided with ever lower interest rates - which may have ended. https://www.macrotrends.net/2324/sp-500-historical-chart-data https://www.macrotrends.net/2324/sp-500-historical-chart-dat...

bravura 3y ago
Just curious, would you have to adjust the values for inflation with these numbers? i.e. to compute the percent of starting years for which 10 years of holding the S&P 500 would underperform 36.3% (the average of the 5 hedge fund-of-funds)?
DeathArrow 3y ago
What if hedge funds would lose even more in those periods?
jjice 3y ago
For a 10 year bet, that's a fair point. Tangentially, over the course of an individual investor's working years, I think this shows that the S&P 500 is pretty good, if paired with appropriate bond allocation as your move towards retirement.
raphaelj 3y ago
Your graph does not show the real return of the SP500, as it does not include dividends.

quartesixte 3y ago

I've probably said this before on HN, but something that tickles me about this entire story is that Buffett himself did not get to where he is by just holding the SP500. But yet this story gets trotted out at the water cooler every once in a while as if this is the source of his wealth, and that it'd behoove us to do the same. Except Buffett and Munger made their money on picking individual stocks and making WSB-style-yolo-bets on them. Or doing classic acquisition/PE stuff (Geico, See's, etc). The other thing that always catches me off guard about this story (as a late millennial) is how Index/ETF investing was not a common thing when this bet was made! Which is crazy to me but all this advice that media (traditional and social alike) that is made to seem timeless was not a clear-cut obvious answer in the early 2000s. Which makes sense when you consider the fact that these ETFs are actually fairly recent phenomenons.

dmoy 3y ago
ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people
- pests 3y ago
  > SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?
  - dmoy 3y ago
    Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.

jnsaff2 3y ago

Just today a friend shared whats below. I have no claim that it is true or verified. "After Bill Gates became friends with Warren Buffett, he began to diversify his portfolio and sold Microsoft shares. Bill Gates' fortune today is 138 billion dollars, if he hadn't diversified it would be 1.33 trillion dollars. Be careful with diversification and with friends who recommend it." EDIT: there is at least one source https://finance.yahoo.com/news/bill-gates-could-trillionaire-today-163852659.html https://finance.yahoo.com/news/bill-gates-could-trillionaire...

majani 3y ago
On the other hand Munger said that diversification is for those who don't know what they're doing. So maybe Gates wanted to stock pick and Buffet talked him into diversifying safely
OJFord 3y ago
Ok, now imagine a concentrated holding by founder of something like WeWork, or a fallen giant of yesteryear (especially wrt inflation / opportunity cost by comparison to some broad index). For every formerly concentrated investor who would've done well to stay concentrated, there's tonnes who did and shouldn't have, or didn't and would've suffered if they had.
episteme 3y ago
It still could have been the best decision at the time. Imagine you bet on a coin flip landing heads. After it's flipped and lands heads it's not useful to say you should have bet your net worth on it.
graton 3y ago
Tell that to the Enron employees who had all of their retirement 401k in Enron stock. Yes of course if someone is able to pick the exact stocks that will go up the most then they will do wonderful. The problem is that it is impossible to know which stocks are going to succeed or fail. Also the Bill & Melinda Gates foundation is estimated to be worth $69 billion. And probably most of that has come from Bill Gates.

tacocataco 3y ago

Money would be a fun game if it didn't have real world consequences.

DeathArrow 3y ago

Renaissance Technologies and other small funds constantly beats index funds. So it depends on the hedge funds.

SilverBirch 3y ago

Sorry what has happened to Yahoo Finance? First - Buffett didn't be that he could beat Hedge Funds, he bet that the S&P will beat hedge funds - he was basically making the opposite argument that the headline implies. He was betting the fees and inefficiencies of Hedge Funds meant they wouldn't beat the market. Not that Buffett personally could outperform them. Then one sentence into the article they start trying to shill dodgy commercial real estate investment strategies. Can we just take a moment to consider the balls you have to have to insert that suggestion into this article about what Buffett is saying. I'm fairly sure the message Buffett was trying to push wasn't "Hedge funds are bad you should go and put your money into highly suspicious alternative investment schemes".

chx 3y ago

https://www.wealthfront.com/blog/illusion-stock-picking-skill/ https://www.wealthfront.com/blog/illusion-stock-picking-skil... > most buyers and sellers know that they have the same information as one another, what made one person buy and the other sell? > the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. > the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice. There is general agreement among researchers that this is true for nearly all stock pickers, whether they know it or not — and most do not

YesThatTom2 3y ago

Buffet’s point was the people that make money in hedge funds are the managers, not the investors! I live 15 miles west of Wall Street in a suburb called Montclair, NJ. There’s a neighbor of fancy mansions locally known as “hedgefund manager row”. It ain’t called “hedgefund investor row” for a reason!

Galanwe 3y ago
Hedge fund clients are mainly institutionals, not individuals, you obviously won't find "Oklahoma Pension Fund's Mansion". Also, most hedge funds have either a "pass through costs /performance fees", or "management/performance fees" (generally at 2/20%). Meaning they earn money on the absolute returns they make for their clients. But if you want to believe that the world is dumb and hedge fund managers earn money through clueless clients, sure. You might also want to checkout the arguments of flat earthers, it's in the same vein.

dxs 3y ago

Principles: (1) asset allocation (2) diversification (3) rebalancing Investments: no-load index mutual funds/etfs (1) total US stock market index (2) total US bond market index (3) total world stock market index, excluding US Prime resource: Bogleheads.org – Investing advice inspired by John Bogle (1) www.bogleheads.org (2) www.bogleheads.org/wiki/Main_Page

raccoonDivider 3y ago
Do you still expect that to work now that the decade of low interest rates is over? Shouldn't people buy individual bonds instead?
- bombcar 3y ago
  The answer depends on what you are doing, why you are doing it, whether you are in a tax advantaged account, and how you need the money. All of those affect what you should do and what is optimal. https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_f... Reasons for a fund may include ease of management, variations in contributions and times, uncertainty of when the need, and ease of rebalancing. Individual bonds may be more appropriate for a defined liability at a specific time, for a bond ladder, or as a tax minimization strategy.
- misja111 3y ago
  Who says it's over? The current US fed rate is only at its 50 year historical average now, and most investors expect the fed to considerably lower its rates again this year.
- 2OEH8eoCRo0 3y ago
  Stay the course! https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
sodality2 3y ago
Just started reading Bogleheads’ Guide to Investing, quite a good read so far. It’s very informative about how the investing/trading industry relies on regular people giving up their gains on fees, loaded funds, etc when a simple investment plan like above is incredibly low risk.

thecookielab 3y ago

Hedge funds hedge. News at 11.

black_13 3y ago

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