Warren Buffett Bets Against Hedge Funds

According to this story at Fortune.com, Warren Buffett recently entered into a friendly wager with hedge fund-of-funds manager Protege Partners which is based in New York. Each party has put up approximately $320,000 to buy a 10 year zero coupon Treasury bond that will be worth $1 million when it matures in 10 years.

Buffett's bet is based on his opinion that many investment managers, and especially hedge fund managers, charge such high fees that it creates an insurmountable hurdle to delivering competitive returns to investors.

I agree with Mr. Buffett's assertion, however only time will tell whether he's making a profitable bet. The bet began on January 1st, 2008 and will run for 10 years.

Bottom line . . . Buffett is betting that the hedge fund manager won't be able to beat the S&P 500 over a 10 year period net of all fees and expenses. And Protege has a high hurdle to clear -- a total fee of 2.5%.

By the way, if 2.5% sounds really expensive to you, that's because it is. However, that's still the rule more than the exception when it comes to investment structures typically peddled by active managers and Wall Street firms.

I'm not going to call the winner because I don't claim to be able to read crystal balls or tell the future, but let's check back in 10 years and see what happens. It should be interesting.

By the way, all the money goes to charity.