Warren Buffett: A Hedge Fund Genius

Warren Buffett versus the Hedge Funds

Nowadays, hedge funds are looked at with suspicion and mistrust. They are still trusted to make the big bucks for anyone who is willing to invest in them. Warren Buffet had a different idea.

Warren Buffett, who is one of the world’s most wealthy individuals, is someone who the world stops to listen. If he has an opinion, or if he trusts in investment, the world holds the same belief and opinion. So when he made his infamous bet against the hedge funds, the world waited with bated breath to see how it would end up.

What was the Infamous Bet?

Warren Buffett wanted to make a particular point when he made his bet against the hedge funds. He wanted the world to know that to make a smart investment, to make money off of stock, you do not have to put all of your money into a big name stock.

Instead, he wanted to show the world that you could invest money in a plain, simple, inexpensive stock, and it would outperform major, larger corporations.

The bet was relatively straightforward, if not time-consuming. Warren Buffett claimed that after ten years, his small fund would earn more money than the large hedge funds. Whoever ends up winning after ten years, would claim the million dollar winnings. The world was in shock.

No one had ever made such a bet and in such a public setting. If Buffett lost, his reputation would be forever tarnished. He placed his name, his reputation, and his money on the line by making the bet. But what is the small fund which Buffett put in all of his trust?

Vanguard 500 Index Fund Admiral Shares

Buffett decided that when he made this bet, he would rely on the then unknown, small, and inexpensive Vanguard 500 Index Fund Admiral Shares. This index fund was one of the first that could be invested in by an individual and is backed and supported by the famous S&P 500 Index Fund.

Ever since people saw this as a way to gain diversified exposure to the equity market in the United States. Thanks to its connection to the S&P 500 Index Fund, investors have access to the top 500 of the top performing United States companies, making it now an extremely competitive stock index fund to be held.

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Who is Warren Buffett Up Against?

Who exactly is Warren Buffett betting against in this historical bet? Protege Partners, a money management firm based out of New York City answered the challenge against Warren Buffett.

For this bet, they chose five different funds to battle against Buffett’s one index fund. However, the exact five funds that Protege Partners has used for this bet are being kept secret. They drew the battle lines, and the war has been continuing for several years into the ten-year bet.

Who is Winning?

After eight years, it is very clear the Buffett made a smart choice when he decided to get behind Vanguard 500 Index Fund Admiral Shares. In the eight years, the Vanguard is up 65.7%, versus the hedge fund’s increase in a small and meager 21.9% average profit.

When Buffett made the bet, nobody believed that he would be able to win. After all, Protege put up a strong grouping of funds to match Buffett’s bet. Many people think that the gap between the hedge funds and Buffett’s index fund is too large to overcome and that Buffett has all but won.

Buffett’s Lead Decreasing

In the eight years since the inception of the bet, Buffett has shown absolute dominance over the performance of Protege Partners in all years but two. This past year was the second such year. In the past year, Buffett’s chosen index fund showed a profit on 1.4%, which was narrowly less than the 1.7% of the Protege Partners five hedge funds. While Buffett’s lead has slipped slightly because of this underperformance by Vanguard, Buffett has little cause to be worried.

Buffett is the Expected Winner

Despite the losses incurred in the last year, Buffett’s command over Protege Partners is overwhelming. He has shown that you do not have to trust in the large name hedge funds always. You can branch out into smaller, less well known, inexpensive stocks, and still make money off of your investment.

There are only two years left in the bet, and most financial experts believe that the hedge funds will have a difficult time making up the gap and beating out Buffett. However, some are not so sure and believe that the expected downturn in the economy could be good for the hedge funds. Historically, hedge funds have outperformed index funds in a weak economy.

We can only wait and see what the next two years bring to this new bet.