When global stock markets closed at the end of 2017, Warren Buffett strode into the winner’s circle to claim more than $2 million for Girls Inc. of Omaha.

In 2007, Buffett wagered that no investment professional could pick a portfolio of at least five hedge funds that would outperform a low-fee S&P 500 Index fund over the subsequent decade.

Protégé Partners accepted the challenge. At stake was a donation to a charity of the winner’s choice. By the end of 2016, Buffett’s lead had become so large that he declared victory.¹ His opponent conceded. Now it’s official.

The takeaways

Our Chairman Bill McNabb has written about this bet before.

The bet matters because it illustrates principles that can help us with our own portfolios. For plan sponsors, these principles can also help your plans and participants:

  • First, the amount that we pay to invest determines our share of the rewards from any investment strategy, whether it’s a large-cap U.S. stock index fund or a complex hedge fund.
  • Second, the reason we invest is to meet a financial goal.

The bet doesn’t matter, on the other hand, because its measure of success may have nothing to do with our own goals, or those of plan participants. If we’re saving for retirement, a child’s education, or a home, beating a hedge fund or the S&P 500 Index isn’t the point.

The less clients pay, the more they keep

Investment performance is always time-period dependent. A strategy that works in one ten-year period may not in the next. In the next ten years, perhaps Protégé Partners’ more diversified mix of asset classes and strategies will prevail. Who knows?

What Buffett made clear, however, is that the more you pay, the less your share of the returns produced by any investment—a mathematical reality too easily overlooked.

Source: Vanguard, using data from Morningstar.

Consider the table above. Over the ten years of Buffett’s bet, those S&P 500 Index funds with expense ratios in the lowest quartile (the bottom one-fourth) returned 8.37%, almost 99% of the index’s 8.50% return. Those in the highest quartile returned 7.39%—just 87% of the index return.

If your savings goals called for an investment in an S&P 500 Index fund, the low-cost options would have delivered almost all of the index’s gains, accelerating your progress. If your goals called for an allocation to Protégé’s hedge funds, your share of their lower returns would have been more modest.

In early 2017, Buffett wrote, “I estimate that over the nine-year period roughly 60%–gulp!–of all gains achieved by the five funds-of-funds were diverted to the two levels of managers.”² (The first level is fees charged by the underlying hedge fund managers. The second level is fees levied by the manager who selects these managers.)

If returns are high enough, perhaps 40% of the gains is enough. But superior returns are hard to sustain. And your ability to meet your goals depends not only on the success of your chosen strategy but also on your share of its returns. For retirement plan sponsors, plan design can help your participants make smart decisions.

Eyes on the goal

The bet’s prize—a charitable contribution—was a reminder that investing is not simply a battle of wits waged in the capital markets. It’s an undertaking that can improve our own and others’ lives.

As The Wall Street Journal’s Nicole Friedman explained, “The real winner of Warren Buffett’s 10-year bet against hedge funds is Girls Inc. of Omaha.” Girls Inc. will use Buffett’s prize to cover the cost of “transitional housing for 16 young women who are aging out of foster care.”³

We can never know which strategy or asset class will outperform over a given period. We can control how much we pay. And the greater our share of a given strategy’s returns, the better our ability to meet our goals, or those of our participants.

1,2 Berkshire Hathaway Inc., Shareholder Letters, 2016.

³ Nicole Friedman, “Buffet wins his hedge-fund bet—and this nonprofit wins bigger,” The Wall Street Journal, December 30, 2017.


  • All investing is subject to risk, including the possible loss of money you invest.
  • Diversification does not ensure a profit or protection against a loss.
  • Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.