Warren Buffett is more often right than wrong, but maybe not on hedge funds

Warren Buffett recently won a US$1-million bet after predicting that the S&P 500 would outperform a basket of hedge funds over a 10-year period.Dennis Van Tine/Future Image/WENN.com

Warren Buffett recently won a US$1-million bet after predicting that the S&P 500 would outperform a basket of hedge funds over a 10-year period. Investors watching the bet may therefore think that hedge funds have no place in a portfolio; they would be wrong.

The reasons Buffett won seem at first glance to revolve around the total fees paid when investing. It’s relatively easy to find an exchange-traded fund that tracks a major equity index for a fee of 0.1 per cent (10 basis points) or less. Hedge funds, on the other hand, tend to have much higher total fees that combine an average fee of 1.5 per cent to 2 per cent per annum on the assets under management, along with 20 per cent to 50 per cent (in some rare cases) of the trading profits. Seems like an easy win for Buffett. Furthermore, market volatility has reached all-time lows and many of the world’s stock and bond markets have been putting in a strong showing, with the exception of resource-laden stock markets such as Canada’s over the past few years.

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