The Hedge Fund vs WarrenLeave a Comment
OK, we have all heard of hedge funds, but do we know what they are? They are supposed to be the holy grail of investment success, where the best of the best managers mange money for the super wealthy?
Well, Warren Buffett the renowned Billionaire investor and CEO of Berkshire Hathaway, he believes that the investors would do better, just buying the market and not using active funds of any kind, here’s what he said in his 1996 shareholder letter:
“Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.” Warren Buffett 1996 – Shareholder Letter
Warren believes this so much that, in 2007 he personally placed a very large $1 Million bet against a New York money manager Protege Partners, LLC. The bet;
“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
So, after 7 years of performance data, where do we stand in the race?
Through the seven years, the S&P 500 index fund, is up 63.5%. That’s the portfolio carrying Buffett’s colours. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).
So, 70% of the way through this experience Buffett looks like he’s made the right choice, so if the best New York money managers can’t choose from all of the worlds best funds to beat the market, can you beat it, with the funds you have available to you?
This was the sixth straight year that the contest has tilted in Buffett’s direction: Buffet’s shares were up 13.6% in 2014 and the average gain for the funds of funds was 5.6%. Only in the first year of the bet—which began in 2008, a year that was a train wreck for both the economy and the stock market—did the funds of funds win, so to speak. They were down, on average, only 24%. The S&P 500 plummeted by 37% that year!
But, Buffett has, over the years learned to remove his emotion from investing, he stayed with the program, and didn’t try and time the market, or bail out in 2008.
So, we’ll have to see how this concludes over the remaining 3 years, we’ll keep you updated.
But, what about LEXO, how has Lexo compared to these results?
Well, it’s only fair to compare similar risk rated portfolios. The S&P 500 is a 100% equity index, so this would be comparable to the Lexo 100 which is 100% equity – shown below at 100% Simulated, this is what we have. Remember when looking at the below, the S&P 500 is an index, not a fund, so not fees/fund management charges have been deducted.