Seven years ago Warren Buffett and Ted Seides of Protege Partners made a bet. Buffett bet on passive investing in the S&P 500. Seides said hedge funds would out perform.
Whoever's investments made more over ten years would win and the loser would donate a million dollars to the winner's choice of charity.
With three years left Seides is WAY behind the oracle of Omaha.
Related: Protégé Partners: These factors ‘wreaked havoc’ in our bet against Buffett
Seides stopped by Yahoo Finance to explain what happened. He says for Buffett the bet came down to the high fees charged by hedge funds.
“Hedge funds have high fees,” Seides admits. “People like me who pick them charge a layer of fees on top of that. So the question is can these managers be good enough to pay for the fees and Warren thought no and we thought yes.”
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That bet took place in 2008. At the start with the financial crisis hitting its stride it seemed Seides might have a point. And then the S&P went crazy, averaging 18% returns over the last six years and leaving Buffett one top of the podium unless something very drastic were to happen in the next three years. “If we look back we’re losing this bet. No bones about it,” Seides admits.
Related: Cry me a river that leads to Omaha
So what happened? Seides explains:
When you own a hedge fund you own a few things. You own a pile of cash, you own some exposure to the market and then you own this skill of a manager perhaps, and then you have some fees and expenses.
As interest rates [go] to zero the pile of cash that you own in a hedge fund earns you nothing. The market piece that you own in a group of hedge funds is actually far more diversified than the S&P which is really 50 stocks… [with a] global small cap bias. And the S&P 500 has been probably the best performing index in the world.
As any true optimist would, Seides is looking forward, not back, and still believes in a hedge fund strategy.
He says it’s unlikely that rates stay this low for another 7-10 years and equally as unlikely that the S&P 500 have another six years like the last six, making hedge funds look more attractive once again.