Key Takeaways
- • Protégé Partners loses decade-long wager: The fund-of-hedge-funds firm's five handpicked hedge funds averaged net returns of only 2.2% annually, losing decisively to Warren Buffett's S&P 500 index fund, which returned 7.1% compounded annually over the ten-year period ending December 31, 2017.
- • Prize pool more than doubles to $2.27 million: The original $1 million wager, initially funded with $320,000 from each party into zero-coupon bonds, was redirected into Berkshire Hathaway B shares in 2012 at approximately $89.70 per share. The stock's rise to $202.74 by the settlement date nearly doubled the charitable donation to Girls Inc. of Omaha.
- • Significant windfall for Omaha education charity: Girls Inc. of Omaha will receive approximately $2.27 million—either in cash or Berkshire B shares—representing nearly 91% of the organization's entire 2016 annual revenue of $2.5 million, pending final fund receipt and form determination.
- • Index funds decisively outperform active hedge fund management net of fees: The bet's outcome underscores the challenge of beating low-cost passive index strategies after accounting for management fees, a core thesis Buffett has championed for retail and institutional investors alike.
Summary
Protégé Partners, a fund-of-hedge-funds manager, has conceded a ten-year wager initiated in late 2007 with Warren Buffett, with Girls Inc. of Omaha positioned to receive approximately $2.27 million in winnings. The original $1 million bet pitted Buffett's thesis that an S&P 500 index fund would outperform an actively managed basket of five hedge funds—carefully selected by Ted Seides, then co-manager of Protégé Partners—against the proposition that professional hedge fund managers could generate superior risk-adjusted returns net of all fees.
The structural mechanics of the wager involved each party contributing $320,000 into zero-coupon bonds that would mature to $1 million at the end of 2017. However, in 2012, both sides agreed to liquidate the bonds and redeploy capital into Berkshire Hathaway B shares, purchasing approximately 11,200 shares at roughly $89.70 each. The subsequent appreciation of Berkshire B stock to $202.74 at settlement nearly doubled the prize pool, demonstrating both the long-term compounding power of equity markets and the secondary benefit of Buffett's confidence in his own company as a vehicle for long-term wealth creation.
The performance disparity proved substantial. Over the decade-long measurement period, Buffett's S&P 500 index fund generated 7.1% in compounded annual returns. In stark contrast, the five hedge funds selected by Protégé averaged merely 2.2% net annual returns—a gap that underscores the persistent headwind of management fees and performance-based compensation structures in the active hedge fund industry. According to Institutional Investor's reporting, the five funds collectively produced only 0.13% cumulative returns on an uncompounded basis, highlighting the difficulty of achieving alpha in efficient markets while bearing the cost burden of professional management.
The $2.27 million donation represents a transformative gift for Girls Inc. of Omaha, Buffett's designated beneficiary. The organization's 2016 annual revenue totaled $2.5 million, meaning the charitable payout will effectively equal nearly the organization's entire annual operating budget. Roberta Wilhelm, the organization's executive director, indicated that the funds are expected to arrive and that the board will determine whether to accept payment in cash or Berkshire B shares. This wager, widely cited in academic and professional circles as evidence of the structural challenges facing active management, provides institutional investors with empirical validation of low-cost passive indexing as a superior long-term strategy for most capital allocators.
The structural mechanics of the wager involved each party contributing $320,000 into zero-coupon bonds that would mature to $1 million at the end of 2017. However, in 2012, both sides agreed to liquidate the bonds and redeploy capital into Berkshire Hathaway B shares, purchasing approximately 11,200 shares at roughly $89.70 each. The subsequent appreciation of Berkshire B stock to $202.74 at settlement nearly doubled the prize pool, demonstrating both the long-term compounding power of equity markets and the secondary benefit of Buffett's confidence in his own company as a vehicle for long-term wealth creation.
The performance disparity proved substantial. Over the decade-long measurement period, Buffett's S&P 500 index fund generated 7.1% in compounded annual returns. In stark contrast, the five hedge funds selected by Protégé averaged merely 2.2% net annual returns—a gap that underscores the persistent headwind of management fees and performance-based compensation structures in the active hedge fund industry. According to Institutional Investor's reporting, the five funds collectively produced only 0.13% cumulative returns on an uncompounded basis, highlighting the difficulty of achieving alpha in efficient markets while bearing the cost burden of professional management.
The $2.27 million donation represents a transformative gift for Girls Inc. of Omaha, Buffett's designated beneficiary. The organization's 2016 annual revenue totaled $2.5 million, meaning the charitable payout will effectively equal nearly the organization's entire annual operating budget. Roberta Wilhelm, the organization's executive director, indicated that the funds are expected to arrive and that the board will determine whether to accept payment in cash or Berkshire B shares. This wager, widely cited in academic and professional circles as evidence of the structural challenges facing active management, provides institutional investors with empirical validation of low-cost passive indexing as a superior long-term strategy for most capital allocators.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.