Ted Seides Concedes Bet with Warren Buffett
Ex fund manager here. Some things about this bet that need to be mentioned:<p>- It should be risk adjusted. No idea how the numbers come out, but what&#x27;s the sense in comparing the return without the accompanying variance? For example if the S&amp;P has 15% vol over the period but the hedge fund 30%, that factor of two needs to be taken into account somehow.<p>- Management fees of 2% are clearly too high for this day and age. They came about historically when hedge funds were collections of small amounts of money, happy to take large risks. If you&#x27;re willing to have volatility of 36%, paying 2% a year is going to be different from paying 2% for 12% vol. Part of the reason vol is lower is institutional investors are not HNWs. I used to run a fund that ran 36% vol as a target, and the IIs came to us and said they couldn&#x27;t present it to their superiors. The explanation that you could just put less capital in didn&#x27;t seem to resonate with the box checkers. Must be something that Kahnemann and Tversky could illuminate.<p>- I&#x27;m not sure the thing about the S&amp;P being unnaturally strong is a valid excuse. If you&#x27;re a hedge fund, you are free to just do a leveraged play on the S&amp;P, thus beating it if you think it&#x27;s going up. Same goes for what will inevitably come up, the extraordinarily loose monetary policy following the crisis. Whatever caused the S&amp;P to go up, you could have bet on it.<p>- The bets are against funds-of-funds, which compound fees. You might be paying 2&#x2F;20 to the underlying funds and 1&#x2F;10 to the manager of this portfolio. That&#x27;s a pretty big chunk. Normally what the FoF says to its customers is they have access to funds that others don&#x27;t, through good relationships gained over years. Though looking at the summary in Buffett&#x27;s letter it looks like even if you added ~30% for the 10 years of fees to each group, you still wouldn&#x27;t beat the S&amp;P. But that&#x27;s just my late night eyeballing, perhaps with the performance fee it would be in the ballpark.<p>- Buffett stipulated it had to be multiple funds-of-funds, probably because this would mean you&#x27;d get S&amp;P with costs. What else are a bunch of mainly American hedge funds going to invest in, given you have hundreds of underlying funds? You might get the odd emerging markets fund, but they&#x27;ll be swamped out by the hundreds of generic funds that just punt some US stocks. Restricting it to funds-of-funds is actually pretty smart, because FoFs are going to tend to be conservative and take a selection from the buffet (yeah I said that). Allowing individual hedge funds might have given a very different result.