

Buffett's bet: Hedge funds can't beat the market - toffer
http://money.cnn.com/2008/06/04/news/newsmakers/buffett_bet.fortune/index.htm

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marvin
Interesting that Warrren Buffet should make this bet. He, of all people,
should know that extraordinary managers are able to produce extraordinary
returns (1.5x to 2x the average?) over time. I think this is reflected in the
fact that he only figures he has a 60% chance of winning. It seems he is
hanging the bet on the extraordinary _fees_ that hedge funds claim, and hence
saying that they _would_ do better over time - just not after the fees.

This is a worthwhile addition to the debate of index funds vs. the best of
actively managed funds - most participants in this debate are awfully black-
and-white. I have seen several critics practically say that there is no such
thing as a better-than-average investor - just a normalized distribution of
investor luck.

Hasn't anybody done a survey on this? It shouldn't be too hard to determine
with statistics whether the world's top investors are better than or on par
with the expected variance in luck. I strongly favor the position that a good
investor _can_ beat the market over time..with the caveat that it takes 10 or
20 years to determine who these investors are.

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notauser
The assessment of fund management suffers from the usual problem - there are
bound to be some people who really are just that lucky.

For simplicity if you look at just the last two years and four fund managers,
statistically one of them will have won in both years. He will rationalise
this away (his 'system') and claim to be a good manager of money.

There are enough funds that quite a few of them are _certain_ to have won in 9
of the last 10 years, further reinforced by the fact that losing funds tend to
close.

Because of this effect I would say that past performance is a horrible
predictor of future performance. Certainly I am happy to put my money where my
mouth is - with the exception of sensible diversification (cash and bonds) my
savings are all in low fee index funds.

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DTrejo
I see you have read The Black Swan. I learned a lot too when I read it. And it
is an especially must-read for those getting into trading and fund management.

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notauser
Nope, just took too many stastics classes I guess :)

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nazgulnarsil
take a list of 1 million people. tell half that a particular stock will go up
and half that a particular stock will go down. discard the 500,000 that you
were wrong to and do it again, tell 250,000 that a particular stock will go up
and the other half that it will go down. Repeat a few times until you have
only a few thousand people left whom think you have been right 7 or 8 times in
a row. Tell them you are a stock guru and will teach them your system for
$10,000. Profit.

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byrneseyeview
One of the alleged selling points of a hedge fund is that their short-selling
makes them outperform during market downturns. So it's a little odd that
Buffett stipulated just returns, rather than returns adjusted for some measure
of risk (if I had something that returned .5% less than the market on days
when market was doing better than average, and .5% more than the market when
it did worse than average, this would be a better thing to own than just a
market index, even though it gets exactly the same average return -- because
it's giving me extra money right when I'd want to buy other things, in
exchange for giving me less money at times when I'd prefer to sell).

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noodle
while its true that index funds will usually beat out managed funds, its tough
to put in such a hard constraint, in this case, of 10 years. it really depends
on the business cycles and depths/peaks of the recessions and booms.

i kind of feel like this contest is more of a coin flip and will _mostly_ only
benefit the hedge fund people.

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coglethorpe
My bet: Buffet and hedge fund managers make lots of money.

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motoko
"Buffett" is a brand name for financial media. This is a meaningless ploy to
sell more Buffet-branded media, and it doesn't merit any rigorous scrutiny.

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bluehatrider
I used to like Warren. That was until he got so chummy with Bill Gates. Now I
won't even watch Fox News anymore.

