Warren Buffett made a friendly bet four years ago that funds that invest in hedge funds for their clients couldn't beat the stock market over a decade. So far he appears to be winning.
The wager made on Jan. 1, 2008, pits the Omaha, Neb., billionaire against Protégé Partners Llc, a New York "fund of hedge funds."
Protégé built an index of five funds that invest in hedge funds to compete against a Vanguard mutual fund that tracks the Standard & Poor's 500 index. The winner's charity of choice gets $1 million when the bet ends on Dec. 31, 2017.
The Vanguard fund's low-cost Admiral shares returned 2.2 percent, with dividends reinvested, from the start of the bet through Feb. 29, as stocks rebounded from a 12-year low in March 2009. The hedge funds fell about 4.5 percent, based on Protégé's index returns for the first three years and results since then for the Dow Jones Credit Suisse Hedge Fund Index, which has roughly tracked the group of unidentified funds when adjustments are made for extra fees.
Neither Buffett nor Scott Tagliarino, a spokesman for Protégé, would comment on the bet's progress.
Buffett's argument is that funds of hedge funds cost too much, according to a statement he posted on longbets.org, a website backed by the nonprofit Long Now Foundation that fosters "long-term thinking."
Hedge funds typically charge an annual management fee of 2 percent of assets, and 20 percent of the gains they earn. On top of those costs, the funds of funds add another layer of fees, on average 1.25 percent of assets and 7.5 percent of any gains, according to data compiled by Bloomberg.
Stock index funds, by contrast, seek to keep shareholder expenses to a minimum. The Vanguard index fund involved in the bet had annual expenses of 0.06 percent of assets, according to Vanguard's website.
Fortune magazine reported Wednesday that, through 2011, the fund of hedge funds was beating Buffett by a slim margin. Bloomberg estimated the return of the fund of funds through Feb. 29.
Shares of Buffett's own holding company, Berkshire Hathaway, have slumped almost 17 percent since the end of 2007.