As we all know, the ten-year battle royal between Hedge Funds and the Oracle of Omaha did not end well for the former. It was not close: Warren Buffett’s S&P 500 Index just about doubled between the beginning of 2008 and the end of 2017, Ted Seides’ basket of baskets of hedge funds (a.k.a. funds of hedge funds) gained about a quarter. It was so lopsided that Seides cried uncle months before the bet actually ended, while Buffett somewhat less-than-magnanimously said that he’d sooner entrust his massive wealth to a moldering corpse than to a stinking, thieving hedge fund manager.
Seides certainly conceded the bet, but even a decade-long ass-kicking wouldn’t get him to concede that the premise behind Buffett’s side—that hedge funds, on account of their high fees charged by their generally underwhelming managers—will always lose to the broader market over the long term. Instead, Seides countered that he’d made the wrong bet on the wrong thing (funds of funds) against the wrong thing (the S&P 500) for the wrong reason (trying to prove that hedge funds are a good long-term investment) at the wrong time and for the wrong amount of time. This may make him a rather sore loser (and terrible spokesman for the hedge fund industry), but, given that rather wide scope of error, he’s not entirely wrong.
The HFRI Fund Weighted Composite Index finished April narrowly ahead of the S&P 500, which posted a loss, including dividends, of 0.38 percent through the first four months.
Though the overall hedge fund performance was muted and the beat narrow, it was the first time the industry has outperformed the basic stock market index since 2008. In that instance, both hedge funds and stocks got clobbered, but the former's loss of 19.03 percent wasn't as dramatic as the 37 percent decline in equities during the worst of the financial crisis.
Which is to say if Seides had accepted a bet that Buffett did not make, specifically that the S&P 500 would beat a basket of hedge funds over the first four months of a given year, specifically one ending in the number eight, he’d have won that bet if he’d chosen the right hedge funds. Of course, this would have been as true in 2008 as it is now (the S&P lost about 7% in the first third of that year, and if his basket had included Paulson & Co., he’d probably have won). On the other hand, if Buffett had not refused Seides’ double-or-nothing offer on account of his advanced age, the last four months prove nothing, because of course the first four months of 2008 were part of the first bet, as were the last eight months of the same year, and those added up to a nearly 1,800 basis point head start for Seides’ fund of funds of funds, and he still got clobbered.
All the same, congratulations to the hedge funds on having produced, on average, 77 bps of alpha over four months.