Warren Buffett’s Bet Against Fees

Warren Buffett is not a gambler. Mr. Buffett did not become the greatest investor of all time, if not one of greatest investor of all time, if he made bad bets and lost more bets then he could win. Casinos tip the odds in their favor and Warren uses his experience to tip the odds in his favor. A relentless desire to eradicate anything and everything that negatively impacts investor returns caused Warren to make a $1 million bet with hedge fund, sometimes called The Million-Dollar Bet.

The terms of the bet are simple, Warren made a 10-year wager that the S&P 500 would outperform a sampling of hedge funds. Under the terms of the wager, Buffett is betting (with his own money, not Berkshire’s) on the stock market performance of an S&P 500 index fund while Protégé Partners, a New York money manager, is banking on five funds of hedge funds (the names of which have never been publicly disclosed) that Protégé carefully picked at the outset.

Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%.

What does Warren’s bet mean for you? Warren is shining a light on the fees that impact investor returns. Typical management fees for hedge funds are 2% of assets and 20% of back end profits. Said another way, the principals of the hedge fund make money even if the investors loose money and hedge fund owners take a portion of money earned by investors.

Legacy Capital was set up to create certainty for investors so investors know how much they will be making every month, rather than waiting for what may or may not happen in the future.

Best news is that the winner of this bet goes to charity, looks like Warren gets to choose which non-profit benefits from an additional $1 million in funding!


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