Warren Buffett on Hedge Funds

Critics | June 10th, 2008

Warren Buffett has once again debated the value of hedge funds. True, not all funds are created equal, but there are no doubt many funds that beat the averages and in some instances by wide margins.

What Others Think

Matt - Trading System Reviews Added:

June 11th, 2008 at 4:02 pm

I’ve got to say I think he will win that bet. It’s not about how good the hedge funds are, but how much you lose to the managers. The hedge funds they are investing in take 2% plus 20% of profits, then the fund of fund he is betting against takes 2% plus 20% of profits…that is a huge amount of drag they have to overcome to beat the S&P500.
Look at it this way, if you designed a system that could essentially lose 2% of the equity from each trade, then lose 20% of the profits (but you get to keep all the loses!) from each trade and still make a profit greater than the S&P, you’d be pretty happy. For example if you have a system that returns you 17% per year and you took those fees out it would make about 11%.
Add to this a further tax the overall system itself by losing 2% of it’s equity each year and 20% of any profits and this takes your returns down to around 7%. To get over 11%, which is typical for the S&P500, you need to get an average return for the funds you invest in of almost 25% pa before fees.
I’m not sure about you, but if there are enough funds out there with 25%+ returns that you can build a fund of funds out of then I’d be willing to risk that I can find one that returned better than 11%….

Ken - Todays Breakout Stocks Added:

June 11th, 2008 at 9:57 pm

I think Protege is shooting themselves in the foot here in two ways. One, they are investing only in funds of funds. The more funds they invest in the more diluted their returns will be. Second, they are avoiding funds with “in and out” trading strategies. The further they get away from “in and out” trading the closer they get to “buy and hold” trading and that pretty much guarantees mediocre returns. If it were up to me I would just go with the statistics and select the top 10 funds based on their past 20yrs+ peformance history.