The futility of investing in hedge funds

Warren Buffett and Jack Bogle unite

There would appear little common ground, other than their ages, between Warren Buffett (Business magnate and often referred to as the most successful investor and stock picker in the world with a Net Worth of $66.7 Billion) and John Bogle (founder of the Vanguard investment Group).

Yet within a fortnight, they recently gave very similar speeches on the futility of investing in Hedge Funds (the supposed solution for many sophisticated high net worth investors and loved by Private Banks).

Bogle pitched index investing as David fighting the intellectual Goliaths of algorithm-driven hedge funds, active mutual funds and the new breed of “smart- beta” managers. The index fund relies on a simple arithmetic, a mathematical tautology that could be calculated by a second grader: gross return in the stock market, minus the frictional costs of investing, equals the net return that is shared by all investors as a group.

It is eight years since Mr Buffett wagered $1M for charity that a simple Vanguard S&P (US stockmarket) index fund would beat any portfolio of five hedge funds anyone cared to construct over the next decade. Ted Seides, the hedge fund manager who took up the challenge, is losing badly. It is hard to see his portfolio closing the gap in respective net returns after fees: the hedge funds have returned 22 per cent while the S&P is up 66 per cent!

More likely, this wager will become the high-profile embarrassment to the Hedge fund industry that Mr Buffett hoped it would be. Meanwhile, the rise and rise and rise of Vanguard and its index-tracking copycats is more than just a symbolic humiliation to active fund management. As Morningstar, the data provider, reported last month, the shift of money out of actively managed mutual funds has accelerated in the past year.

Mr Buffett joked at his meeting that he would put on the same anti-hedge fund bet again today except that, at aged 85, having to wait 10 years to collect “gets a little more problematic as we go through life!”

Acknowledgement: Stephen Foley from the Financial Times