Submitted by A Dash of Insight

Almost anything Warren Buffett does attracts attention.  A bet for a million dollars certainly qualifies!

Background

For some time, Warren Buffett has expressed skepticism about hedge fund performance beating the broad market averages.  He has frequently offered to bet a million dollars that a basket of ten hedge funds would not beat the market.

Protégé Partners LLC has taken up the challenge.  Carol Loomis, a journalist close to Buffett, broke the story today.  It will take ten years to setttle the bet, which involves each side putting up $320,000 to buy zero-coupon treasuries.  The stake, held by a firm specializing in such long-term bets (who knew?!), will be worth a million dollars in ten years.

Mr. Buffett’s Unusual Position

Warren Buffett, about whom we have written fondly and frequently, rejects the efficient market hypothesis.  We wrote about his opinions and included some typically colorful quotations in this piece from two years ago.  He famously notes that he would be selling pencils on a street corner if markets were efficient.

In fact, all of us in the investment management business expect to beat the market averages by  a wide margin.  If not, how could we justify charging a fee?

Our Conclusion

Surely Mr. Buffett does not believe that he is the only manager who can beat the market.  He must be doing one of two things.

First, he could be shooting at a very narrow window.  He might agree that others can generate marginal advantages, but not enough to overcome the fees charged by hedge funds.

Second, he could just be generating some publicity and money for some good charities.  After all, he is giving nearly all of his money away anyhow, so why not stimulate more charitable interest.  It is a good way to use his high profile for the greater good.

And Protégé?  We wish them well. We would take their side of the bet.  In fact, we would make the bet ourselves, but our advertising budget is not big enough!

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