Looks like the 8 year update is out. Buffett's index fund is still dominating overall, with a 65.67% return compared to the hedge funds at 21.87%. The hedge funds did win in 2015, 1.7% to 1.3%.

http://fortune.com/2016/02/16/warren...on-dollar-bet/

I'm still holding the majority of my wealth in low cost vanguard funds, and I'm still feeling fine about it.

A little slow on my yearly follow up. The vanguard fund continues to dominate the hedge funds, Up 85% to 22%.

In his shareholder letter, Buffett said he believed the hedge fund managers involved in the bet were "honest and intelligent people," but added, "the results for their investors were dismal – really dismal." And he noted that the two-and-twenty fee structure generally adopted by hedge funds (2% management fee plus 20% of profits) means that managers were "showered with compensation" despite, often enough, providing only "esoteric gibberish" in return.

http://www.investopedia.com/articles...-brka-brkb.asp

I wonder if this bet will have any significant effect on the amount of money invested in high fee hedge funds? I suspect it won't. Those that believe in the hedge fund will explain away these results claims about the wrong fund, wrong time, or bad luck and keep paying high fees. And people like me will just keep on paying our 0.05% fees in Vanguard funds.

I definitely think this kind of attention could reduce investors' appetite for funds of funds in particular. Drawing attention to fee structures doesn't hurt either.

Depends on how much attention the bet gets when Buffett wins. Lots of places like CNBC might not run the story since they live off of ad revenue (same thing with Dave Ramsey and his investment "advisors/professionals")...whereas others might not stop talking about it (like Suze Orman or Clark Howard...I could see them talking about the bet for decades nonstop).

It's sad to see so many people get swindled (I used to be one of them) but at least people's eyes are slowly opening.

Is it correct to think that it will be easier for hedge funds to make money if more people buy index funds?

Depends what you mean by that. Of course it's easier for them to make money in a bull market.

Just seems like some S&P500 stocks have to be overpriced if some large percentage of buyers buy all 500 companies.

Also, is there lots of money to be made speculating on which stocks will enter and leave the index? Does a stock price shoot up when added because the index funds have to buy? Could someone corner the market?

good questions......... google some combo of russell 2000 rebalancing and index fund tracking errors.... i think that stuff works but 1) as more people know of it and do it then it's 10's of thousands of investors competing for a limited $$$$ value of alpha; 2) similar to comment #1 but not sure how much you can invest in these strategies.

a further question that is more long term related is will good companies that are too small for major etf/indexation craze provide amazing long term returns...... my guess is "no" as people will still be aware of them and "semi-arb" away their amazing return potential.... argument is sort of circular in different ways. requires some deeper thinking on my part.... peter lynch made a fortune for people buying neglected high quality companies. but now there are 10s of thousands of investment firms screening for those opportunities every night.

is buffet's bet based on hedge fund's after all fees/carried interest/etc.?

not sure of the bet's effect itself, but isn't the trend in hedge fund assets - independent of market - negative? these guys don't seem like the rock stars they were years ago, but they may still be making really good money quietly.

look at what happened to Yahoo! when they joined the S&P500

With hedge funds, there is a difference between making money and beating the market.

Hedge funds make money by taking fees from their investors. They take that money whether or not they beat the market. More people buying index funds usually means less money in hedge funds, so that will not help them make money.

Hedge funds might have a better chance of beating the market if there are more people invested in index funds. This remains to be seen.

that's one reason i really respect bloomberg's new service. they constantly publish articles disdainful of hedge funds and wall street's fees and value-added even though those are by far their largest most lucrative customers - paying $30k per year per seat, or something like that.

wall street journal is the same but their revenue base is much much more fragmented i.e many more people paying far far less per month.

aren't alot of hedge funds performance fees net of the stock market?

i think the idea of his question is/was that the more people put money into indexation and/or etf's the less efficient the market for individual small to medium cap stocks becomes.

Yes, large amounts of money just following a formula creates mispricings, which in theory funds can take advantage of.

Yes a lot of people bet on what companies get added to an index but the game is very very crowded now. SP600 deletes are pretty interesting. Seems like they are frequently good buys

If you mean that they'd only get paid if they beat the S&P500 or a similar benchmark, no. In theory a hedge fund should be beta neutral (many are obviously not and don't represent themselves as such) so it wouldn't make sense to benchmark returns to an equity index.

The "standard" afaik is still 2% of assets plus 20% of profits though a lot of funds are moving away from that.

i'll preface this by saying i'm no expert but here's what i think.

tons of hedge funds now seem to be long the market most of the time - long beta as it were. the idea of hedge funds being "hedged" i think is a really old idea......

i think hedge funds are basically defined those by 2/20 model...... i think tons of the 20% performance fees have hurdle rates - often not S&P 500 return - because sponsors realize these funds are long the market.

paying a 20% performance fee for a 100% long equity fund when the S&P returns 25% is crazy. that manager would be paid 7% for just matching the S&P.

paying a 20% performance fee if the fund is beta-neutral (on some macro level) could be ok....

as i said, i could be wrong about this. hedge funds certainly aren't "hedged" by shorts. they might be by derivatives but i haven't much about that.

pete, looks like you were right and i was wrong..

hedge fund returns seem to have far lower market beta than i thought.

hurdle rates are increasing though it seems.

nothing to do with any earlier comments. but some hot and large hedge fund managers used to charge 50% of returns.. yikes!!!

There's different types of funds. I think people are increasingly realizing that pure stock picking "hedge funds" that are long 100% (more likely long 100+x/short x) simply aren't worth anything close to 2/20. Most of them probably aren't worth 2/0.

That said, funds that can produce good returns with near zero market correlation (like a good quant fund should) probably deserve a lot more than 2/20.

if a ~0 beta hedge fund with a consistent history of 20% returns before fees wanted to let me invest for a 60% fee i'd throw a lot of money at them

https://www.nytimes.com/2017/04/14/b...ds-growth.html

This recent article seems relevant.

Things that haven't been discussed in this thread that (I think) are relevant:

- Most hedge funds only target institutional money
- Volatility adjusted returns (sharpe ratio) vs absolute returns
- gain-to-pain ratio
- correlation to other assets in the portfolio

Seems like 2p2 has a quite uniform view that indexing > hedge funds, which imo isn't quite as simple as that. Hedge funds serve a purpose but don't necessarily suit individual or even most investors (because they're not designed to...).

At the moment it's very easy to say hedge funds are bad and index funds are great, considering for the past 9 years the market has gone straight up with almost no volatility. It's pretty tough to beat the market when it goes on one of the best streaks of all time.

i did a moderately deep drill down on some of these things.... barclay hedge data etc.

the category long-short market-neutral hedge funds seems to have anywhere from 0.4 to 0.7 beta. that's pretty high for market-neutral.. i'm curious as to how closely and real-time their investors track this.... being long MU,FCX, LVS etc. and short XLP (consumer staples) is not market-neutral.

pete, as per 20% market-neutral track record. that is the past. that is one of the the best managers out of tens of thousands and we've basically had giant investment waves since 1995. didn't need tons of stock picking to do really well. definitely need right general industries but not that many shifts/trades.

are really successful hedge funds like SAC and Renaissance? market neutral. because they do/did charge huge fees.

if tons of funds are market-neutral, is that long-short or long and then S&P 500 derivatives hedge? if it's the latter, does the hedge fund manager or the ultimate investor - like Yale - do that?

one thing to keep in mind about hedge funds in the USA. trading gains on positions held less than a year pay much much higher tax rate. so even your amazing trading hedge fund manager needs to beat the benchmark soundly to make up for the negative tax alpha........ not true most other countries and many hedge fund investors are non-taxed...

anyway, i want to learn more and it seems like many of us on here know alot about this but different things.. which is good

btw, if you've never heard of any of renaissance and jim simons sp/name?, bridgewater/ray dalio and AQR/Asness, you can learn a ton reading about them and their work. the latter 2 more. renaissance/simons is more just staggeringly good long-term record.

I'd say most hedge funds that apply a short term trading strategy understand this and only offer this type of service for institutions that are tax-exempt.

True hedge funds pride themselves on being as market neutral as possible but nowadays pretty much any fund that restricts its investors class to rich people and institutions call/incorporate themselves as hedge funds.