# Buy 'n Hold vs. active investing hedge funds



## Trevor_S (9 January 2009)

I see someone has taken Mr. Buffett up on his offer from a few years ago, $1,000,000 is on offer.   Possibly this has been talked about here before, me being a newcomer and all, if so, I apologise in advance.

http://www.longbets.org/362

_Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses

Warren Buffett_

http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.fortune/index.htm

_Seides himself sees one strong ray of light: "Fortunately for us, we're betting against the S&P's performance, not Buffett's."_


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## Temjin (9 January 2009)

*Re: Buy 'n Hold vs active investing hedge funds*

This one is tough and it really depends on the general economic environment over the next 10 years.

If we have an inflationary event, Buffet will easily wins because stock prices would have been inflated much higher than the absolute return being generated by the fund of hedge funds.

However, it also really depends on the selection of the hedge funds. The larger the size of these funds, the more correlation it would have with the equity index and less return they might be able to generate. If it was a portfolio of managed futures that all had respectable reward / risk ratio and give high returns (only possible if fund invested are relatively low, like less than $10 million), and the hyperinflation scenario do not appear, then the challenger might win.


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## theasxgorilla (10 January 2009)

*Re: Buy 'n Hold vs active investing hedge funds*

When you first read that it sounds like Buffett is knocking the hedge fund industry, which indeed he may be doing.  But the bet is only concerned with a ten year rate of return.  The purpose of investing in funds of hedge funds is typically to achieve investment goals aside form outright returns eg. the risk exposure to your capital, and the journey you as an investor and your equity curve must take to achieve a given return objective.  

Whilst Buffett may win the bet it doesn't change the fact that buy and hold for 10 years can be painful.  The fact that Buffett can do this has everything to do with the fact that he invariably holds large controlling interests in the companies whose stock he owns, and has little to do with the fact that he is doing something that so many financial planners believe retail investors should emulate (minus the controlling interest...such a minor, minor factor, NOT).


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## Trevor_S (10 January 2009)

*Re: Buy 'n Hold vs active investing hedge funds*



Temjin said:


> However, it also really depends on the selection of the hedge funds.




Indeed, one can only hope for their sakes none of them were Madoff related (directly or feeder), or they are in trouble from the get go... 



theasxgorilla said:


> The fact that Buffett can do this has everything to do with the fact that he invariably holds large controlling interests in the companies whose stock he owns,




but then in this instance he is talking about the S&P index...

_Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds_

That aside, that's some of his point though: no taxation costs, no transaction costs, no management costs, no opportunity costs spent looking at funds for hours every day etc etc etc


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## theasxgorilla (10 January 2009)

*Re: Buy 'n Hold vs active investing hedge funds*



Trevor_S said:


> That aside, that's some of his point though: no taxation costs, no transaction costs, no management costs, no opportunity costs spent looking at funds for hours every day etc etc etc




I see one point.  But it's an odd way to make it if the hedge funds were never aiming to beat that index.


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