A Big Bet

In the summer of 2006 Warren Buffett challenged a hedge fund manager to outperform a tracker fund over a ten year period.

It took a year for Ted Seides, a founder of Protégé Partners, to take up the challenge. There is a betting book in my club – the stakes at least in recent years are modest. Warren and Ted each bought a Treasury Bond that cost about $320,000 maturing in 2018 when they would be worth a million dollars; the winner to give the dosh to charity.

Ted could see the sub-prime crash coming and reckoned he’d make money in a falling market while a tracker would be a loser. In fact hedge funds lost about 20% in 2008 but the trackers lost 37%; a bad start for Warren and his S&P 500 tracker, managed by Vanguard.

Fast forward ten years and Vanguard’s 500 index fund was up 126%. Ted chose five funds-of-hedge-funds and they returned a pitiful 36%. Much of this divergence is not because Vanguard was cleverer than Protégé. All Vanguard did was to track the S&P 500 index, while hedge fund managers are pro-active but, crucially, charge high fees; and a fund of funds double dips.

Robin Wigglesworth wrote about the big bet in FTWeekend but if you are interested you should read his book: Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever.

Warren Buffett gave his million dollars to Girls Inc.