In 2007, Protégé Partners and Warren Buffett made a million dollar bet. Buffett entered the bet because he didn’t like that the hedge fund charges its investors high fees and promises to outperform the market. So the bet was that Protégé’s hedge fund would NOT outperform the S&P 500 Index fund over the ten years to follow (As Yorkville Advisors constantly does.)
In the Beginning
When it all started, Protégé was allowed to pick a handful of their funds to stand against the S&P 500. Buffett, the chairman of Berkshire Hathaway, is known for two main things – his investing skills and knowledge, and his philanthropic efforts. So, having made the $1M bet, he established that if he won, the proceeds would go to a charity called Girls Inc. of Omaha Nebraska.
The Wall Street Journal reported that Protégé Partners’ hand-picked funds gained 2.1% annually during the decade that passed. The S&P 500 outpaced them significantly showing a 7.1% annual gain on average. Do we hear a big cheer coming from Girls Inc.? The payment is guaranteed by money each side put into a zero-coupon Treasury bond – in the amount of $320,000.
At the time, everyone thought that would grow to approximately $1 million over ten years. Because of that, the investment was moved in 2012 buying 11,200 class B shares of Berkshire Hathaway. As of mid-January, those shares are valued at $2.22 million.
Active vs. Passive Management of Funds
Since the financial crisis just after the beginning of the bet, passive funds such as the S&P 500 had great gains than what actively managed funds such as those included in this bet by Protégé Partners. However, the buy-in costs tend to be lower for active funds while market funds like the S&P cost more for the initial buy. When you consider the management costs, over time that may help even out the complete cost.
However, in regard to this bet, Ted Seides, Protégé Partners’ founder made his concession about this last May on Bloomberg View. But he also said “My guess is that doubling down on a bet with Warren Buffett for the next 10 years would hold greater-than-even odds of victory. The S&P 500 looks overpriced and has a reasonable chance of disappointing passive investors.”
We have to wonder how Mr. Buffett feels when it comes to a similar challenge for the next 10 years. Since Berkshire Hathaway has never worried much about the high cost of shares in their organization, he’d probably willingly take on a similar bet for another decade.