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2014: Update on Buffett's hedge fund bet.
WARREN BUFFETT: OK. We’re at noon.
I promised a group — some people — six years ago I made a bet for charity on how a index — Standard and Poor’s 500 index fund — would compare in performance to a group of hedge funds. And a firm in New York took me up on the bet.
And I promised that every year I would give the up-to-date results on how we’re doing. And it’s getting to be more fun to give these results every year. (Laughter)
We’re now six years into the bet. And it’s interesting, because the people who selected these funds are very decent people and smart people. And, obviously, the fund of funds gets paid based on the per — they get paid a fee, naturally.
But they also get paid an additional performance fee based on how the hedge funds they select do. So they have every economic incentive to come up with a wonderful group of hedge funds.
And underneath these fund — five funds of funds that are involved in the bet — there are probably, at least, 200 hedge funds that the fund of fund managers have carefully picked in order to enhance their own income. They got the ultimate motivation going for them.
So we are now five years — six years — into the bet. And the first year, the fund of fund groups, in a down market, did considerably better than the S&P.
But as you can see in the five years subsequently, the S&P has been running away, to some degree.
Interestingly enough, we bought — we each put in 350, or something, thousand dollars, and we bought zero-coupon bonds so there would be a million dollars in ten years.
We bought ten-year Treasurys, zero coupon. And we bought a million dollars principal. We each put up 350.
Well, the way interest rates changed after a few years to practically zero rates, it meant the bonds, even though they had no coupons attached to them, practically went to par.
So, a year or two ago, we sold the bonds at about 95 or 6, we got almost the full million dollars. We put that all in Berkshire stock. I guaranteed them that they would have a million dollars at the end of ten years, no matter what happened.
And so the prize looks like it’s going to be quite a bit more than a million dollars when the ten years comes around, so. So, so far, everyone’s happy.