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Ted Seides concedes that the odds of him winning his bet with Warren Buffett don't favour his portfolio of FoHFs
Seven-and-a-half years into a 10-year bet that a portfolio of funds of hedge funds would outperform the Standard & Poor's 500 stock index, things are not looking good for the hedge funds.
Through 31 December the S&P 500 proxy, represented by Vanguard's 500 Index Admiral Shares mutual fund (VFIAX), was up 63.5%. The fund of funds portfolio was up an estimated 19.6%. That means Warren Buffett, the legendary value investor and chairman and chief executive of Berkshire Hathaway Inc., who bet on the stock market, will win his wager against fund of funds Protege Partners and its co-founders Ted Seides and Jeffrey Tarrant, who put their money on a portfolio of five funds of hedge funds. Or at least Buffett will have proved his point that hedge funds aren't worth the fees they charge investors.
"Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested," Buffett wrote at the so-called Million-Dollar Bet's outset (http://longbets.org/362/). "A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralising, and their IQ will not overcome the costs they impose on investors.
"Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds."
Protege countered that funds of funds' flexibility to put together portfolios of better-than-average managers would "earn returns that amply compensate for the extra layer of fees their clients pay."
"For hedge funds, success can mean outperforming the market in lean times, while underperforming in the best of times," Protege wrote on the bet's home page. "Through a cycle, nevertheless, top hedge fund managers have surpassed market returns net of all fees, while assuming less risk as well. We believe such results will continue."
Thus far through this particular cycle, that has been far from the case. Apart from the first year of the bet, when the Vanguard fund lost 36.97% and the fund of funds portfolio lost 23.90%, the Vanguard fund has consistently outperformed the portfolio...