I’ve referenced this in articles and videos over the years but there may be some people out there not familiar with it and would find it interesting so let’s update the famous…

Warren Buffett:  S&P 500 vs Hedge Funds wager


Nearly 10 years ago Warren Buffett made an open wager to anyone who would take the bet that a passive investment in the S&P 500 index would outperform a hand picked basket of hedge funds.  Now different people have varying opinions of Buffett but you gotta love how direct he speaks:

Buffett says:  “After all, these managers urge others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?”

He’s right, why should they?  Well, I can think of one reason.  Because historical data shows that the majority of hedge funds underperform the S&P 500 in the long-run.

They do a better job during market crashes, but bull market years tend to be far more numerous than bear market years and hedge funds just can’t keep pace with equities.

So it would take a pretty brave and confident person to take this bet.  Well someone did.  Ted Seides wagered a balanced group of hand picked hedge funds was up to the challenge.

Now the bet isn’t officially over until the end of the year but it would take a Christmas miracle to turn the tides.  Starting in January of 2008, in the past 9.8 years of the 10 year window here are the results:

-In that time the S&P 500 is up over 90%
-The basket of hedge funds is up about 23%

Should we be surprised by this result?  No of course not.  A few minutes of research would be enough to conclude that the odds were stacked against him.  In the last 20-30 years, hedge funds have a poor track record against the S&P 500 and I see no reason why this will change anytime soon.  But there is someone who is surprised by it, and that’s the guy that took the original bet.

Ted Seides says:  “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. The S&P 500 looks overpriced and has a reasonable chance of disappointing passive investors.”


Wow really?  The bet wasn’t even close, and he thinks another 10 years will make a difference?

Now I do agree with him that the S&P 500 is at extreme valuations right now and is likely going to disappoint over the next 10 years.  That’s how investing works, price and value at the starting point of the measurement period matter.  We’re at a very high starting point right now so it wouldn’t be surprising at all to see the forward 10 year CAGR of the S&P 500 be in the mid to low single digits.

But I just can’t imagine why he thinks the solution to that problem is hedge funds.  Hedge funds these days are over 90% correlated to the S&P 500.  They track it, but just worse and have high fees.  If the S&P 500 disappoints, guess what happens to hedge funds?


So Buffett won this 1 million dollar bet, and interestingly they actually put the million dollars into Berkshire Hathaway stock and it’s now worth nearly 2 million.  I believe Buffett said he’s donating the money to charity, so there’s a charity out there that’s very pleased Mr. Seides didn’t do his homework.

In one of my very first articles I wrote back in 2010 I said:  “Unless a fund manager is willing to embrace out of the box investing methods and be open to going against the status quo, I see no reason why passive investing won’t continue to outperform vanilla active managers going forward.  I’d be willing to bet that a simple fund comprised of 50% stocks, 25% bonds and 25% gold will outperform most actively managed hedge funds going forward.”

I don’t have anything close to a million dollars to gamble with, and even if I did I doubt I could ever find someone to bet with me, but does anybody out there have any reason to believe this trend of hedge funds getting trounced by passive index funds is going to change?


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