Warren Buffett believes that rich investors are paying too much for their investment advice. “The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.” Therefore, they overspend on their investment advice.
To prove this point, Buffett offered a bet nine years ago. He believed that any group of five hedge funds—an investing vehicle popular with the very rich—would fail to outperform an S&P 500 stock index fund over ten years. The bet would be handled by Long Bets, a nonprofit seeded by Jeff Bezos that handles these kind of transactions. The proceeds go to the charity of the winning bettor’s choice.
Only one financial professional accepted the challenge. Five “fund of funds” were selected, so that in the aggregate over 100 hedge funds were in the mix. That way, the superior or terrible performance of one fund would not skew the result.
Hedge Fund Fees
The usual fee is “2 and 20,” that is, there is an annual fee of 2%, and in good years the managers also keep 20% of the profits. In bad years, the annual 2% fee applies, and there is no “clawback” from prior years to make up for the losses. In addition to these costs, a fund of funds will charge about 1% for the expertise involved in picking the very best of the hedge funds.
As matters stand today, Buffett looks likely to win his bet. The S&P 500 was up 85.4% since the bet was made. The five “fund of funds” were up 8.7%, 28.3%, 62.8%, 2.9%, and 7.5% – on average that won’t be close to beating the index fund. Only a major stock market crash in 2017 could cause Buffett to lose his bet.
The reason the hedge funds did so poorly, according to Buffett’s calculations, is that roughly 60% of the gains that the funds experienced were eaten up by the fees. Extrapolating to the market as a whole, Buffett asserted that $100 billion in excessive investment fees have been paid over the past decade.
Last year for the first time, the Berkshire Hathaway annual meeting was available via live streaming. Buffett reported that 1.1 million unique visitors watched part of the presentation live, and another 11.5 million viewed some or all of the program later.
Given that level of success, the live stream will be repeated this year. The annual meeting will be held on May 6, beginning at 9 a.m. Central Time, with the opportunity to ask questions until 3:45 p.m. This occasion provides an outstanding educational experience for investors of all ages and abilities.
Do you have a question concerning wealth management or trusts? Send your inquiry to Adam Cox, JD, MBA.
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