Buffett's hedge-fund bet: fees, not skill, decide the race (opens the source in a new tab)
- ET Prime's series on Buffett's shareholder letters reaches 2016, when he publicly offered to bet that a cheap S&P 500 index fund would beat any five hedge funds over ten years. Only Ted Seides of Protégé Partners took him on.
- Nine years in, the index fund had compounded at 7.1% a year against 2.2% for Seides's five funds-of-funds. Buffett reckoned roughly 60% of what those funds did earn went to the two layers of managers.
- The letter's other lessons: a buyback helps the owners who stay only if shares are bought below their worth, paying for deals in stock can cost far more than cash, and investors should hold cash for rare panics.
- 60%
- of the funds' gains taken by managers
- 7.1%
- index fund's yearly return
Why it matters Fees compound as surely as returns. For savers in India and the US alike, a low-cost index fund is the default to beat, and the burden of proof sits with anyone charging more.
Other side Some managers do beat the market for decades, as Buffett himself concedes, and an index fund rides every bubble the market does.