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. Photo: Bloomberg

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Warren Buffett, one of the most successful investors in the world, made a $1 million bet in 2008 that pitted index funds against hedge funds. The bet, which was made with asset manager Protégé Partners, was a long-term wager on which investment strategy would outperform the other over a ten-year period.

Buffett, a vocal advocate of index funds, argued that most investors would be better off putting their money into low-cost index funds that track the performance of a broad market index, such as the S&P 500. On the other hand, Protégé Partners, a fund of funds manager, backed a portfolio of hedge funds as the better investment option.

Now, after ten years, the results of the bet are in and they speak loudly in favor of Buffett’s choice. The S&P 500 index fund selected by Buffett has outperformed Protégé’s portfolio of hedge funds by a wide margin. In fact, the index fund has returned an annualized gain of 8.5 percent, while the hedge funds have only managed an annualized gain of 2.8 percent.

This outcome is a clear victory for Buffett’s belief in the effectiveness of index funds as a long-term investment strategy. It also underscores the limitations of hedge funds, which are typically more expensive and have failed to deliver superior returns compared to the broader market.

The implications of Buffett’s bet go beyond the result itself, as it brings to light the broader debate between active management and passive investing. On one side, hedge funds and other actively managed funds often charge high fees and promise to outperform the market through their strategies and expertise. On the other side, index funds, as passive investments, offer low costs and simply aim to match the performance of the market.

Buffett’s bet once again demonstrates the power of simplicity and low-cost investing that index funds provide. While hedge funds may offer the allure of high returns and active management, the reality is that they have not been able to consistently deliver on these promises.

Furthermore, the bet also serves as a reminder of the importance of fees when it comes to investing. A high fee structure in hedge funds can considerably eat into returns, and many investors may find themselves in a better position by opting for low-cost index funds.

In light of the bet’s results, it is clear that Buffett’s advocacy for index funds over hedge funds is well-founded. As individual and institutional investors continue to evaluate their investment options, the lesson from Buffett’s bet is clear – a low-cost index fund can be a powerful and effective way to achieve long-term financial success.