From the Business Journals
The 86-year-old Warren Buffett took a big swipe at the hedge fund industry in his recent annual letter to shareholders.
Buffett slammed the hedge funds, which he has said could not keep up with an S&P 500 Index fund. The Oracle of Omaha estimated investors wasted more than $100 billion on Wall Street money manager fees during the past decade.
“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett wrote in his annual letter(PDF) to Berkshire Hathaway (NYSE: BRK) investors. “Both large and small investors should stick with low-cost index funds.”
Buffett has a strong case. In 2016, passive strategies attracted $504.8 billion in new money, while active managers saw $340.1 billion in redemptions, according to Bloomberg, citing data from Morningstar.
Buffett was high on index funds as far back as 2008 when he made a $1 million decade-long bet with Ted Seides, the co-manager of Protege Partners. Seides bet hedge funds would make more money over 10 years, claiming that shorting stocks would have an advantage in falling markets. Buffett placed his trust in an S&P 500 Index fund — a low-cost Vanguard S&P — which he said would far outperform the hedge fund.
The billionaire provided an update on the bet in his letter — a $1 million investment in the bundle of hedge funds would have generated a $220,000 gain through 2016, while the index fund would have seen an uptick of $854,000. Buffett estimated that 60 percent of the gains the hedge funds produced during the period were eaten up by management fees. The bet officially ends on Dec. 31 and the wager will be donated to charity.
“I’m certain in almost all cases the managers at both levels were honest and intelligent people,” Buffett wrote. “But the results for their investors were dismal — really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved fees that were totally unwarranted by performance were such that their managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have put it: ‘Fees never sleep.'”
But for all the bluster about index funds, Buffett remained quiet about his eventual successor. While he did not provide any concrete clues in the letter, Buffett did heap a lot of praise upon Ajit Jain, who handles Berkshire’s insurance operations. This has some speculating that Jain may be first in line to replace Buffett.
“Buffett almost always sings Ajit Jain‘s praises (rightly so!),” Whitney Tilson, the founder of the hedge fund Kase Capita, wrote, per Business Insider. “But this year he was particularly effusive — perhaps the best indicator yet that Ajit is his successor?” Jain has long been considered a candidate to become Berkshire chairman, even though Buffett said in 2015 that Jain was “not looking to take my job.”
