Warren Buffett Versus Hedge Funds

Date: Monday, May 2, 2011
Author: Shira Ovide, The Wall Street Journal

At the Berkshire Hathaway annual investor meeting today, Warren Buffett updated a wager he made several years ago with a hedge fund, among the Oracle of Omaha’s least favorite animals in the financial zoo. The hedge fund managers are leading the wager, but the gap is narrowing significantly.

Tired of hedgie bashing from Buffett, a New York money-management firm called Protégé Partners bet Buffett that in 10 years, the cumulate returns of five “funds of funds” picked by Protégé, even after including fees, would outperform the S&P 500 index.

Buffett long has complained about the fees charged by hedge fund managers, and in 2006 he lobbed the bet. Protégé Partners took the challenge. At stake is $1 million, to go to the charity designated by the winner — Girls Inc. for Buffett and Absolute Return for Kids for the hedge fund firm.

Right now, Protégé is in the lead, but the gap is closing. Just before the lunch break, Buffett showed a slide that indicated the cumulative return of the Protégé Partners funds was -4.24% since 2008. The S&P500 is down 8.18% over the same time period. (Yes, these returns are negative. As Buffett has said publicly, the stock market has been fantastic since 1999.)

The hedge funds performed solidly better (or rather, less bad) than the S&P 500 during the market rout in 2008 – down 23.9% compared to a negative 36.97% for the S&P index, Buffett showed. But the gap has narrowed as the stock markets have been on a two-year tear. Last year, the hedgies could do no better than an 8.46% return. The S&P 500 was up 15.05%.