The Buffett Challenge — hedge funds vs. index funds — 9 years on (2024)

FAQs

The Buffett Challenge — hedge funds vs. index funds — 9 years on? ›

The Buffett Challenge, hedge funds vs. index funds, 9 years on. After nine years, hedge fund portfolios are up 22 percent on average, compared to 85.4 percent for Warren Buffett's Vanguard Admiral Shares S&P 500 Index Fund pick. Three of the five hedge funds have average annualized returns of less than 1 percent.

Berkshire Hathaway's sheer size makes it much more difficult to find companies that make a difference to its bottom line. Berkshire Hathaway (BRK. A) (BRK.B) stock over the past 20 years has almost precisely equaled the return of the S&P 500 SPX.

If your market outlook is bullish, you will need a specific reason to expect a hedge fund to beat the index. Conversely, if your outlook is bearish, hedge funds should be an attractive asset class compared to buy-and-hold or long-only mutual funds.

Overall, the consensus is that hedge funds will continue to grow but will adapt to lower fees, greater use of technology, and increased access to retail investors.

Reality Check: S&P 500 Outperforms Hedge Funds 🚀

Data shows that hedge funds consistently underperformed the S&P 500 every year since 2011. The average annual return for hedge funds was about 4.956%, while the S&P 500 averaged 14.4%.

Ten Year Stock Price Total Return for Berkshire Hathaway is calculated as follows: Last Close Price [ 402.10 ] / Adj Prior Close Price [ 128.49 ] (-) 1 (=) Total Return [ 212.9% ] Prior price dividend adjustment factor is 1.00.

"Slightly better" than the average American corporation

Since Buffett took control of Berkshire Hathaway in 1965, the stock has trounced the S&P 500. Its compound annual gain through 2023 was 19.8% versus 10.2% for the broader index.

They might not want to outperform the market

But the main one is that they might not want to, it might not be their goal: as the name implies, some *hedge* funds look for safer bets, rather than higher risk. The key is to obtain a much more stable return, so that the risk to reward ratio is actually better.

Exchange-traded funds (ETFs) and index funds are similar in many ways but ETFs are considered to be more convenient to enter or exit. They can be traded more easily than index funds and traditional mutual funds, similar to how common stocks are traded on a stock exchange.

The average annual gain for the S&P 500 fund was 8.5%, or about 125% compounded for the decade. That means $1 million invested in the index fund more than doubled to about $2.25 million. For the hedge funds—not so much. The best one averaged 6.5% a year, or about 88% compounded.

Do billionaires use hedge funds? ›

The recent Forbes 400 (richest American billionaires) list has about 112 people, by my count, who made their fortunes in some form of Finance, Investments, Hedge Funds, insurance or banking.

According to the data, hedge funds collectively outperformed the broader stock market during down months in the last four recessionary periods (acknowledging that the most recent, two-month-long, COVID-fueled recession contained only one month of equity decline — albeit steep).

Key Takeaways. Hedge funds have been a major force on Wall Street since the 1990s, attracting trillions of dollars of investor money. However, over the past decade, hedge funds, on average, have underperformed their benchmarks, with several closing up shop.

Citadel LLC is one of the largest hedge funds based in the U.S., with approximately $92.46 billion in total assets under management as of Sept. 30, 2023. Citadel has generated roughly $74 billion in total gains since its inception in 1990, making it the most successful hedge fund of all time.

Investments made by hedge funds are short-term, meaning investors can see returns quickly. On the other hand, private equity firms often make long-term investments, and investors may wait years before seeing returns. The paths into private equity vs.

Citadel, which ranked second in 2023, made $8.1 billion in profits after bringing in a record-breaking $16 billion in 2022. Its $74 billion in gains since inception rank it as the most successful hedge fund in history.

Yes, you may be able to beat the market, but with investment fees, taxes, and human emotion working against you, you're more likely to do so through luck than skill. If you can merely match the S&P 500, minus a small fee, you'll be doing better than most investors.

Berkshire Hathaway stock held strong in 2022, making a slight gain compared to a loss of more than 19% for the S&P 500. But it lagged in 2023 rising about 16% compared to the S&P 500's gain of 24%. So far this year it is up around 16%. All-around performance is strong, but not quite ideal, for Berkshire Hathaway stock.

Key Points. Less than 10% of active large-cap fund managers have outperformed the S&P 500 over the last 15 years. The biggest drag on investment returns is unavoidable, but you can minimize it if you're smart. Here's what to look for when choosing a simple investment that can beat the Wall Street pros.

Over the past two decades, up until December 2020, fewer than 10% of actively managed US stock funds were able to outperform the S&P 500. Despite having access to sophisticated strategies, research, and analysis, the vast majority of professional investors cannot manage to outperform the market index.