Saturday, June 14, 2008

It's Not a Big Deal to Agree With Warren Buffett...

...but on this issue, I sometimes feel like I'm in a minority, and it's good to have him on my side! Basically what I believe is what we were taught in Finance 101--markets are efficient and you can't regularly beat the market (although you can have good luck for certain periods). Obviously most people in the financial management business disagree--otherwise, why would you have hedge funds and mutual funds? Now I have suggested that many hedge funds simply have strategies that are more-or-less guaranteed to generally return a better than average performance until they blow up. This has been John Meriwether's basic approach over and over again (although I doubt he'd acknowledge the fact).

What Buffett has done is to make a bet with Protégé Partners LLC, a fund of hedge funds.
Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

They each put up $320K, which if combined and placed in a zero coupon T-bond would yield one million dollars at the conclusion of the bet. The million will go to the winner's charity of choice. (I assume they will pocket the returns in excess of the risk free return, but the article doesn't say).

Of course, this won't prove anything. This method of "proof" is, in fact, fruitless because Buffet would be required to prove that no hedge fund can beat the market over time, which would require him betting against all hedge funds, actual or potential, which is impossible. Still, he is putting his money where his mouth is...

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