Buffet's bet with Protoge: Low cost Index Fund vs Hedge Fund returns

Reference:  https://www.berkshirehathaway.com/2017ar/2017ar.pdf

See pages 11-13, 24-26.

Background

1. Buffet's views are Active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. 
2. The reason:  massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.
3. He wagered $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. He suggested a ten-year bet and named a low-cost Vanguard S&P fund as his contender.
4. Protoge Partners eventually took up the bet.

Buffett's assertion

Bet results after 9 years

1. Compound annual returns for S&P Index Fund is 7.1%, typical of the stock market, and better than Bursa.

2. Buffett's low cost index fund easily beat all Fund of Funds after 9 years.

3. Only initially, in the first year (2008) that S&P500 under-performed.  This is because the Hedge Funds can hold cash/go short.  Even then, their returns were all still negative.

4. However, over 9 years, the low cost index fund beats even the best Fund of Funds, due to high helper's cost.

S&P500 vs KLCI

The green line is S&P500.  The period is 10 years from 1 Jan 2008 to 1 Jan 2018.  Over the 10 years, S&P gained 97% vs Bursa 23%.

Key Takeaways

To paraphrase Buffet - Excitement and Expenses are the enemy of investors.