I have always been cynical about the Hedge Fund industry. I’ve never recommended a Hedge Fund because they have very high charges that only seem to favour the managers themselves (the clever people) and not their customers.

Also, looking at the actual returns from that industry, it has shown some spectacular returns; but there are two problems:

  • It’s not possible to pick out in advance who will perform well or not in advance, and
  • When looking backwards you get a survivor bias. In other words, there are many hedge funds that have failed in the past. What you see are the ones that have survived only.

Warren Buffett has also been frustrated by the Hedge Fund industry claims that it can give you a market beating return, so he challenged them with a $1m bet 10 years ago (with the proceeds going to charity), that the S&P500 index would beat a basket of selected Hedge Funds by Protégé Partners.

The results: The S&P produced an annualised return of 7.1% and the Hedge Funds 2.2%.

The good news for the Warren’s chosen charity was that both he and Protégé Partners invested $320k to cover the bet, which has now grown to $2.22m by investing in Berkshire Hathaway's class B shares. Buffett agreed to give the prize money to Girls Inc. of Omaha, Nebraska, a nonprofit he has previously supported.