So are you saying Buffett doesn't understand this?

I think John C. Bogle would have a strong opinion on this as well.

Please enlighten us?

Disregarding the condescending tone of your post and the fact that you have obviously read at least 1 finance book, a good FoF will display a risk/return profile much better than that of the S&P. Why will they, you ask? Because the FoF industry is hyper-competitive and only the funds that have generated alpha for their investors are still in business.

I couldn't care less what John C. Bogle thinks. Mainly because the thrust of his argument is about actively managed mutual funds underperforming the market (which they do). FoFs are different beasts altogether. Look, in the abstract, the average FoF won't be a good investment because it won't be able to overcome the fees it charges. Fortunately, over time the mediocre funds fall by the wayside and the ones that demonstrate true outperformance remain (capitalism 101). Again, I have no idea about Protege whatsoever, but if they're just a good FoF, Buffet's bet is definitely -EV.

I guess you have read one finance book. Your arguments apply equally well to mutual funds and hedge funds and we know empirically that both classes trail the market over time.

The problems are most clients can't discern good from bad in mutual funds, hedge funds and certainly in FoFs. They mistake lucky short term performance for skill, and can be dazzled by fancy charts, graphs and professional terms to be convinced that subpar performance is actually good "risk adjusted performance".

These products are all sold by salesman to people unequipped to discern good from bad. Its the history of finance products. If the average hedge fund can't overcome its own fees and beat the market, how can a FoF pick enough winners out of the losers to overcome another layer of fees?

so what about if protege was an 'average' fund of funds? by arguing against buffett along with most other people in this thread, you are either saying that fofs in general will outperform the s&p, or you have specific knowledge that protege is a particularly difficult fof to bet against under the current conditions.

From what I've heard, many of the Hedges are using the same Black Box to do their handicapping. If this is really the case, then, they're playing the game with their cards face up.

I'm sure Buffet knows this.

This scenario is similar to when standard charting techniques became popular. The exchange could count on a certain amount of buying and selling at various breakout points.

lol i'd love to know where you heard this

This may be the most unintentionally funny post I've ever read.

I've noticed that all of the smug know it alls here were nowhere to be found when it was time to register for the BFI stock picking tournament.

Could it be that you didn't have the balls to risk being exposed?

Unlike you, I've backed up my mouth with actual performance. Of course, you'll say it's luck, but, the rules were set up to minimize luck.

http://vse.marketwatch.com/Game/Homepage.aspx

I'm in on the next one if theres a 10k entry fee.

Next time I'm looking for a virtual money manager, you'll be at the top of my list.

Usually its a little more subtle. I'll listen to everything buffett says, but if you think worshiping this guy is going to make you rich, lol. Like most super investment guru's, he gives some useful ideas, but he sure as **** isn't going to have a practical application for your own situation.

The whole concept of a fof is absurd:

I don't have the skills to select stocks, so, I'm going to find a professional. I don't have the skills to find a professional; so, I'm gonna find a professional who can find a professional.

If someone is that clueless, they shouldn't be in the market.

You really have no idea what you're talking about. There are many FoFs that have provided superior risk-adjusted returns than any comparable benchmark over a significant period of time. Yes, there are also FoFs that don't do as well. FoF managers do way more than just "find another professional."

dude i dont think you know what a hedge fund is. stock selection is a very small part of the hedge fund business.

lololol

http://www.mcdonalds.com/corp/career.html

ok maybe "very small" isn't accurate but there's a whole lot more to hedge funds than foghatlive seems to think. but a good majority of the equity "hedge funds" don't deserve that name.

oh yeah and you're dumb

lololol....how old are you? Dont worry. Driving a five speed Huffy and living in your parents basement is cool bro.

i dont have a bicycle

You happen to be right. I don't know alot about FoFs because the idea of letting someone invest my money is absurd, to me.


Anyway, so, how do you know the good ones? By their past performance, right?

However, I would think that the FoFs that have done well in the past have gotten very big to the point where one couldn't expect the same type of gains in the future. If I'm correct, then, how would you go about selecting an FoF?

Maybe you can then find a professional, who can find a professional, who, in turn, can find a another professional who can buy Exxon, GE, AT&T, Coke, and J&J for you.

Since I'm a nerd. What metric would you compare hedge funds and SP500?

Its seems like Buffett wants to compare apples and oranges and decided to measure them in grapes or something equally absurd.

i wish buffett made the bet using barron's top 3 portfolio instead of the s&p.
his current bet as i understand it is shorting the benefits of leveraged global asset class diversification (barron's portfolio) vs. the s&p for a 10yr period. that is a pretty terrible bet, especially given that his original assertion / logic for making the bet was shorting FOFs ability to add after-fee value.

Literally true but the real issue is how uncorrelated hedge funds really are to the market -- regardless of whether the hedge funds are explicitly long or not. I'm guessing part of Buffett's reasoning is that they are much more correlated than claimed. Or that he initially tried to get them to make an absolute returns bet and they declined.

Or maybe he just felt like making a bet for the hell of it. I recently bet a friend that oil would be less than $120 (the price at time of the bet) in mid-Oct. Neither of us has any idea what the price will be, it was just a fun bet.

The S&P 500 is a standard benchmark and if Hedge Funds and FoFs can't beat it over long periods they have little use. If you want subpar returns with less volatility just mix index and bond funs/cash.

this is just wrong. hedge funds don't need to beat the s&p500 to improve a portfolio's risk/return characteristics if their correlation with the market is low or negative. in the extreme case, an equity short fund can earn less than a money market account (or even less than zero) and still improve the sharpe ratio of a portfolio a lot more than just investing in bond funds/money market accounts.