Protégé Partners, a fund-of-hedge-funds firm, lost a decade-long bet against Warren Buffett, proving that hedge funds underperformed the stock market. As a result, Girls Inc. of Omaha, a girls’ education charity, will receive approximately $2.27 million.
The original $1 million wager, initiated by Buffett and Ted Seides, co-manager of Protégé Partners at the time, pitted the S&P 500 against five funds-of-hedge-funds chosen by Seides. The winner, determined by the highest net-of-fees returns over ten years ending December 31, 2017, would donate the winnings to their chosen charity. Buffett selected Girls Inc. of Omaha, while Seides chose Friends of Absolute Return for Kids.
Initially, each party invested $320,000 in a zero-coupon bond set to mature at $1 million. However, in 2012, they agreed to sell the bond and invest the proceeds in Berkshire Hathaway, purchasing 11,200 B shares at around $89.70 each. With Berkshire Hathaway’s stock price closing at $202.74 on Monday, the prize more than doubled to $2.27 million.
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This donation significantly impacts Girls Inc., whose 2016 revenue totaled $2.5 million. The winnings, whether received in cash or Berkshire B shares, will nearly match their annual revenue.
Buffett declared a preliminary victory in his 2017 shareholder letter, highlighting the S&P 500’s 7.1% compounded annual increase compared to the hedge funds’ average of 2.2%. He illustrated that $1 million invested in the index fund would have yielded $854,000, while the same investment in the hedge funds would have only gained $220,000.
Seides conceded defeat in a Bloomberg op-ed in May 2017, acknowledging that the bet was essentially over with eight months remaining. Protégé Partners declined to comment on the outcome.
This outcome underscores the long-term performance potential of the stock market compared to hedge funds, validating Buffett’s investment strategy. The substantial donation will significantly benefit Girls Inc. of Omaha, allowing them to expand their educational programs for young girls.
