Index Funds vs. Hedge Funds: Buffett $1,000,000 Bet Update 2015

It is now 7 years in on the 10-year bet between Warren Buffett and a successful hedge fund manager. In 2007, Warren Buffett challenged any hedge fund to a long-term bet against the S&P 500. He found a taker.

Fortune magazine announced “Buffett’s Big Bet”, where $1,000,000 would go to the charity chosen by the winner. The bet would run from 2008 to 2018. Buffett would take the S&P 500, represented by the Vanguard S&P 500 index fund (Admiral shares). Protégé Partners would stand behind hedge funds, represented by the average return of five hand-picked hedge funds.

Carol Loomis has just posted the 2015 update in Fortune. The hedge funds were in the lead early on, but started lagging behind in the 2012 update. In 2013, the performance gap widened to about 30%. The gap has widened even more. In 2014, the S&P 500 index fund went up 13.6%, whereas the hedge funds only rose 5.6%.

Through the entire 7-year period that runs through the end of 2014, the S&P 500 index fund is up 63.5%. The hedge fund marker only went up an average of 19.6%. That’s now a gap of over 40%. With three years left, the hedge funds have some serious catching up to do.

Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. 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).

Will this collection of hand-picked hedge funds be able to outperform a simple, low-cost index fund over the long run? Hedge funds may employ some bright minds but also charge hefty fees of roughly 2% of assets annually + 20% of any gains. At the start of the bet, the past performance of the hedge funds were excellent – from inception in July 2002 through the end of 2007, the Protégé fund gained 95% (after all fees), soundly beating the Vanguard S&P 500 index fund’s 64%. But lots of funds have good performance when looking backwards. It is much harder to pick out winning managers ahead of time (and harder on those managers when everyone is looking and there is too much money to deploy).

Read the terms of the bet and each side’s opening arguments at LongBets.org. This carefully-tracked bet was part of the inspiration for my transparent Beat the Market experiment. Too often, people are not honestly and accurately tracking the performance of their portfolios… again, starting ahead of time! It is natural to point out your winners and conveniently forget the losers.

Read my original 2008 blog post and halfway 5-year update here.