2013: Update On Buffett's Hedge Fund Bet

WARREN BUFFETT: We’re now very close to noon.

I promised — five years ago — I wrote about five or six years ago about the inordinate costs that investors bear in — many investors bear in—getting sold various types of products.

And I talked about hedge funds and private equity and all kinds — and a whole variety of things.

The investment world has been very good at extracting a very significant percentage of the returns that investors get for themselves.

So I offered to bet anyone that wanted to step up to the plate that a group of hedge funds would not beat an unmanaged no-load index over a ten-year period.

And I promised — and then I got a taker, a very nice group of people. I like them. Ted Seides is in the group.

So they took me up on this. So we each put about $350,000 or so into something where in ten years — well, we put it in zero-coupon Treasurys, which would mature and be worth a million dollars in ten years.

And I promised to report on the bet every year.

And what we did this year, interest rates fell so far that our original 700,000 or so investment got to be worth like 950,000 just because the five-year Treasury got so low. So there was very little appreciation left into it between now and five years from now when it matures.

So, we sold the zero-coupon Treasurys and we bought Berkshire with the proceeds, and I guaranteed that it would be worth a million dollars. Currently it’s worth about a million-two, so that the charities are benefiting to some extent.

Now, Ted has one charity, which is a very worthwhile charity. I have Girls Inc. of Omaha, which is a charity I selected.

And we’ll put the — we can put the figures up on the — there as to where we stand at the moment.

The hedge funds got off to a fast start, and were 13 points ahead of the index fund at the end of the first year.

But the last four years — and these are funds of funds, so they really represent probably 2 or 300, maybe, hedge funds underneath.

But there’s two levels of fees involved. There’s the standard fees of the hedge funds, which probably many times are “2 and 20,” but can be other things, and then there’s the fee of the fund of funds on top of it.

So, we now are at the halfway point, and I’ll keep reporting to you every year how we do. And if Berkshire does well, we’ll have well over a million dollars to distribute to one of two charities.

You might enjoy going to a website called longbets.org. That’s where — they’re the people that hold the money.

And you will see that there are a number of propositions that people have wagered on, and the proponents and the opponent of every proposition give a short little description. Ted gave a description of why he thought he’d win. I gave a description of why I thought I’d win.

But some of these are — I just can’t resist a couple of — pointing out a couple of them. You can see these on the web.

But one of it is that a large collider will destroy the Earth in 10 years. Now there’s a $1,000 bet on that, but I’m not sure who will collect. (Laughter)

I thought that was an interesting one. And there was one other, and then we’ll go to lunch. But there are a number of these that are quite interesting.

At least one human alive in the year 2000 will still be alive in 2150. Now, that’s 148 years from when the bet was entered, there’s a $2,000 bet on that.

And I hope Charlie is in contention for the — being the winner of that one.