Are Fund of Funds Worth It?

Hedge funds spend endless time and money strategizing and actively managing portfolios to get the highest return for their investors, who in turn pay them a 2% management and 20% performance fee. Hedge fund of funds spend even more resources on top of that on manager selection and other things. But is all their effort really worth it? Perhaps not. Back in 2008 Warren Buffet made a bet with Ted Seides and Jeffrey Tarrant of Protégé Partners LLC, a fund of hedge funds. He bet that funds that invest in hedge funds couldn’t beat the stock market over 10 years. The Protégé co-founders took him on and made an index of five hedge fund of funds to put up against Vanguard’s low-cost Admiral mutual fund, which tracks the S&P 500. For those of us looking to start investing our own money into these kinds of funds within the next 5-10 years, this may be a worthwhile bet to follow until its conclusion on December 31st, 2017.

Protégé’s reasoning was that hedge funds’ ability to hold securities both long and short, and hence bet on both rising and falling prices enabled it to outperform the S&P even after fees. On the other hand, Buffett argued that while “a number of smart people are involved in running hedge funds…their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.” In addition to the regular 2% management fee and 20% performance fee, fund of funds charge an average extra 1.25% and 7.5%, while Vanguard’s fund charges a mere 0.07%.

Buffett may have drastically 'lost' the bet in year 1 when stock markets crashed in 2008, but he has 'won' years 2, 3 and now 4, as Admiral shares returned 2.2% versus Protégé's -4.5%. It is now almost fully caught up with Protégé, who is down a cumulative 5.89% since the start of the bet, while Admiral is close behind at -6.27%. However, with both funds fighting a close battle, it is hard to say who will be proven right in six years when the bet is over. The only sure winners are the chosen charities that will be receiving a hefty $1 million from the eventual loser of the bet.

Vivien Sung

Comments

Post a Comment

Popular posts from this blog

Exclusive Interview: 2011 8TV Hot Chef (美食型男) Jason Cha

Image
Dubbed as one of the most handsome guy among the participants of popular 8TV shows Hot Chef ( 美食型男 ), Jason emerged as the ultimate winner, not by his look, but his cooking skills. Since then, he became a familiar face in Malaysia. Did you recognize Jason shopping at Mid Valley lately? In order for us to understand more about him, below are some of the his personal details: Full Name            : Cha Kian Heng Age                      : 34 Hometown           : Ipoh, Perak Status                  : Married Hobby                  : Collecting Thai Amulets Favourite Foods : Italian Pizza with many many cheese Favourite Sports : Badminton Favourite Sportsman : Fernando Torres (football player of Spain and Chelsea currently) The Interview: Q: What makes you decided to join the 8TV's 2011 Hot Ch...
Read more

Career Lessons from Breaking Bad

Image
AMC's Breaking Bad ended with a bang last Sunday, leaving viewers generally content and definitely shell shocked. Though the ride is over, we can finally look back at the series and reflect on how we can learn from both Heisenberg's victories and mistakes. How can a meth kingpin help you and your future careers? Here are some takeaways : 1. Be hard to replace   : Find a specific skill set and make sure you are good enough that nobody can quickly take your place. Whether it be modeling, analysis, writing, communication, or even a certain product with a 99.1% purity, having a specific niche or strength can ensure job security. Just try not to kill fellow associates to eliminate competition. 2. Associate with the right people : If you are the smartest person in the room, you're in the wrong room. Surround yourself with people who you believe can bring out the best in you. Doing business with a high school dropout and drug addict will certainly lead to complications in the fut...
Read more

Things We Now Know

The poor are losing ground in the new Obama world.  The facts are showing up even in the halls of collectivist extremes like the New York Times.  The rich are getting richer and poor are being locked in place.  Big government is throttling the economy and the hopes and dreams of lower and middle class Americans. Today's Wall Street Journal's article by Simon Constable lays out some of the simple and obvious facts of the Obama era: "The richest 20% of households account for 38% of spending, according to government data for 2011, the latest available.  Compare that with 2003 when the top earners spent 26% of the total."  The article goes on to say..."it could get even worse."  It will. Who really benefits when the regulators strangle the banks?  Do banks really need to get much more conservative in their lending practices?  Why does the government know best?  How far can you stretch the FDIC guarantees before American banking is simply a subsid...
Read more