“If circumstances identical to those in 2007 are presented today, I would still make the bet… I believe the decision to bet on hedge funds was a good one,” Seides wrote in his recently released book
Capital Allocators.
In 2017, Seides had lost a 10-year bet with Buffett that pitted Vanguard’s S&P 500 index fund against a portfolio of high-cost hedge funds, as represented by the selection of five hedge fund-of-fund products.
“Costs skyrocket when large annual fees, large performance fees and active trading costs are all added to the active investor’s equation… Investors, on an average and over time, will do better staying with a low-cost index fund than a group of funds of funds,” was Buffett’s argument in the wager.
Seides, who was then co-manager of fund-of-hedge funds firm Protégé Partners, had reasoned that with the ability to sort the wheat from the chaff, best hedge funds will earn returns that amply compensate for the extra layer of fees their clients pay.
In the book, published by Harriman House, the hedge fund manager reflects about the probability distribution of outcomes and the quality of his decision process in the famous bet against the ‘Oracle of Omaha’.
“We can make very good decisions that do not work out. When I look back at my decision to bet with Warren Buffett, I still believe it followed a good process and the odds of winning were in my favour,” he said.
At that time, the chances of his winning, according to his own estimation, was at 85 per cent. Buffett was modest, though, by putting the odds of his winning at 60 per cent.
“Stocks appeared priced at historically rich valuations in 2007, and hedge funds seemed a good alternative to help institutional investors meet spending needs. The comparison of a stock market to a portfolio of hedge funds is like comparing apples to oranges, owing in part to different market exposures, risk, and tax treatment. Nevertheless, it seemed a good bet to make at the time,” Seides said.
The author, who hosts the popular Capital Allocators podcast show where he interviews the world’s top chief investment officers (CIOs), believes the active vs passive debate is full of nuances, which are lost in proclaiming the failure of active management.
“Both active and passive are valuable tools that can serve important purposes in achieving investment success… Passive investing is poorly positioned to meet spending needs, and active management is increasingly competitive,” he sums up in the book based on the podcast series.
Buffett’s bias towards passive investing is well-known. “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors,” he had said in his argument while initiating the bet in 2007-08.
In this year’s annual general meeting of Berkshire Hathaway, Buffett had reiterated his advice that index funds or exchange traded funds (ETFs) are better for average investors than betting on a trending sector or stock.
Considered as one of the best investors in the world, Buffett is now having the last laugh on the debate.
