Index Funds vs Hedge Funds- A new world order?
Making a public bet with proceeds going to charity at their annual gathering, Berkshire Hathaway chairman Warren Buffet bet on index funds vs hedge funds. Warning that large pension funds are burning through capital, Buffet bet that a Vanguard S&P 500 index fund would outperform a basket of hedge funds selected by a consultant from 2008 through 2017.
So far the results are stunning. Hedge funds selected by the consultant returned 21.9% while the index fund rose 65.7% over the same period. Calling it the most important lesson investors can learn, Buffet said that high priced consultants are not likely to tell their clients to just invest in index funds.
Prior to the Berkshire Hathaway meeting, NYC’s $51.2 billion pension fund dumped their $1.7 billion of hedge fund holdings which had cost $40 million in fees. The industry as a whole is fighting against the bad press which started with CalPERS selling off $4 billion of their hedge funds in 2014. Last year, almost 1,000 hedge funds closed and overall these funds saw $16.6 billion in outflows over the past two quarters; their returns were .06% in Q1 2016.
But not all firms are following Buffet’s advice and NYC’s pension fund lead as there were almost as many hires as termination through April 2016 with over $20 billion in searches pending.
All of which does not mean that DC plan sponsors should move everything into index funds. As Ralph Haberli of BlackRock explains on 401kTV, there is a place for both types of investments if used properly with the combination of index and passive showing good results.
But the clear move is towards indexing which likely shows that it’s not wise to bet against Mr. Buffet who, while not infallible, is right more often than not.
