Warren Buffett has won his $1 million bet against the hedge fund industry

warren buffettJo Yong-Hak/Reuters

  • In 2007, Warren Buffett entered a million-dollar bet with fund manager Protégé Partners that the S&P 500 would beat a basket of hedge funds over the next decade.
  • His S&P 500 index fund compounded a 7.1% annual gain over 10 years, beating an average increase of 2.2% by the basket of funds selected by Protégé Partners.
  • The prize money will go to Girls Inc. of Omaha.
  • Buffett took issue with hedge funds' high fees and their promise of outperforming the market.

With 2017 over, Warren Buffett has sealed his victory over hedge funds in a bet he made a decade ago.

The Berkshire Hathaway chairman in 2007 bet $1 million of his money that the S&P 500 would outperform a selection of hedge funds over the following 10 years. As of last week Friday, his S&P 500 index fund compounded a 7.1% annual gain over that period. The basket of funds selected by Protégé Partners - the managers with whom he made the bet - gained 2.1%, according to The Wall Street Journal.

Buffett agreed to give the prize money charity. Girls Inc. of Omaha, a non-profit that Buffett has supported a number of times before, is the beneficiary.

Each side first put $320,000 into a zero-coupon Treasury bond that they estimated would be worth $1 million by 2018. But it was moved into Berkshire Hathaway's class B shares when the bond's value rose faster than they were expecting. The 11,200 shares they bought in 2012 were worth $2.22 million on Friday, the Journal noted.

Buffett has long taken issue with hedge funds' promise of outperforming the market, and their high fees that take away from the returns their clients earn.

He's turned out right on both fronts. Actively managed funds have seen outflows while passive funds gained since the financial crisis. At the same time, an abundance of exchange-traded funds has made it cheaper and easier for investors to buy into just about any group of stocks.

"My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory," wrote Ted Seides, a founder of Protégé Partners, in an early concession piece in Bloomberg View.

"The S&P 500 looks overpriced and has a reasonable chance of disappointing passive investors," Seides said in May.
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