Buffett's $1 Million Bet: Index Funds vs. Hedge Funds

Warren Buffett made a $1 million bet in 2007: that hedge funds would not outperform index funds over the next 10 years. WSJ's Nicole Friedman checks the numbers and handicaps Buffett's chances of winning the bet on Lunch Break with Tanya Rivero.

Nearly a decade ago, Warren Buffett made a million-dollar bet: that by investing in a completely unmanaged, broad-market low-fee index fund, he could beat the gains earned by a high-powered hedge fund with a team of managers at the helm. His opponent was Protege Partners, LLC, a New York City hedge fund with $3.5 billion in assets under management.

Hands were shaken, the stakes were set (a $1 million donation to the winner’s charity of choice) and the clock was set for 10 years.

With less than two years to go before the bet expires on Dec. 31, 2017, Buffett was already celebrating at the Berkshire Hathaway (BRK) annual shareholders meeting held in Omaha last weekend.

His simple Vanguard S&P 500 (VFINX) fund has delivered returns more than 40 points higher than those of the hedge fund. “I believe this is the most important investment lesson in the world,” he said.

Despite an initial stumble in 2008, when the index fund was down 37% vs. the hedge fund’s 23.9% loss, the former rebounded in astounding fashion. In its best year, 2013, the broad market index fund saw 32.3% gains vs. the hedge funds’ 11.8%. In fact, his index fund beat the hedge fund’s returns in 6 out of 8 years.

At the end of 2015, Buffett was up 65.7% vs. their 21.9%.