Wednesday 4 May 2016

Biznews.com: Warren Buffett's take on active investment management


If you go to the Internet and you put in longbets.org it’s a terribly interesting website. You can have a lot of fun with it because people take the opposite side of various propositions that have a long tail to them. They make bets as to the outcome and each side gives their reasons. You can go to that website and you can find bets about what the population will be doing 15 years from now…all kinds of things. Our bet became quite famous on there. A fellow I like, whom I didn’t know before – Ted Seides – bet that he could pick out five hedge funds. These were funds of funds. In other words, there was one hedge fund at the top and then that manager picked out who he thought were the best managers underneath, and then bought into these other funds in turn.
Thus, the five funds represented maybe 100 or 200 hedge funds underneath. Bear in mind that the hedge fund (the fellow making the bet) was picking out funds where the manager on top was getting paid perhaps half-a-percent per year plus a cut of the profits for merely picking out who he thought were the best managers underneath. In turn, they were getting paid maybe 1.5 or 2 percent plus a cut on profits. Certainly, the guy at the top was incentivised to try and pick out great funds and at the next level, those people were presumably incentivised too.

The result is that after eight years and several hundred hedge fund managers being involved, the totally unmanaged fund by Vanguard with very minimal costs is now 40-something points ahead of the group of hedge funds.
It may sound like a terrible result for the hedge funds, but it’s not a terrible result for the hedge fund managers. (a) You’ve got this top-level manager who is charging probably half-a-percent (I don’t know that for sure) and down below, you’ve got managers who are probably charging 1.5 to 2 percent. If you have a couple of percentage points sliced off every year…that is a lot of money. We have two managers at Berkshire. They each manage $9bn for us. They both ran hedge funds before. If they had a 2/20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180m annually each merely for breathing. It’s a compensation scheme that is unbelievable to me and that’s one reason I made this bet.....

Read the full article:
http://www.biznews.com/global-investing/2016/05/02/berkshire-agm-transcribed-buffett-rips-into-active-fund-managers/

No comments: