Applied Research Brief: Better Than The Buffett Bet?

A decade ago Warren Buffett bet that public equities would outperform hedge funds. In this month’s research brief, we revisit his bet, this time pitting private equity against public equity. Over the same period as the original bet, Buffet would most likely have lost had his counterparty chosen buyout funds, venture capital funds, or, perhaps, venture funds of funds; against generalist funds of funds Buffett would have won.

Probability Density Function of Cumulative Returns as of Q1 2017

PerformanceDensity2017Q1Vintages2008-2009NumFunds5[1]

Warren Buffett, in Berkshire’s 2005 annual report, argued that hedge funds and private equity tend to reduce returns in the aggregate1. He subsequently wagered $500,000 that no investment professional could pick a portfolio of five hedge funds that would beat the S&P 500. Shortly after, Ted Seides took up his challenge, and chose five funds of hedge funds. The bet ran from the beginning of 2008 to the end of 20172. Ted lost.3

In the brief, we examine what would have happened had a bet been made on the other class of investment Buffett mentioned in 2005, namely private equity.

1Berkshire Hathaway 2005, How to Minimize Investment Returns, pp. 18 – 19.
2Buffet and Protégé 2008.
3Berkshire Hathaway 2016; Seides 2017.

 

 





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