Colorful news week. For those of you who didn’t keep up: Bernanke wore a red tie to the press conference and informed us that he can’t beat Ken Rogoff at chess; QE2 (which will be completed) wore a yellow hat at the wedding; and Warren Buffett isn’t keen on gold.
Which brings us to betting news. A bet on yellow for QE2’s hat paid off 1.5 to 1. You would have gotten great odds at the founding of the ECB if you had bet that an Italian would head the ECB before a German.
Several year’s ago, Buffett bet $1 million that over 10 years the stock market would beat the return to investors (after fees) of the average of any 5 hedge fund of funds chosen by the opponent. Three years in, both sides are down due to the crisis, but gap is tightening: S&P down about 8 percent, the funds down about 4 percent.
According to Carol Loomis, Buffett’s original offer was to bet against the average of any 10 funds chosen by the opponent. Protégé, who took the bet, negotiated it down to 5.
The Guru can only see two good reasons for Protégé to bargain for a smaller set, and both reasons support Buffett’s long-time assertion that the funds are a bad investment due to the high fees. Perhaps in Protégé’s view, there are only a very small number of worthwhile funds. Alternatively, perhaps Protégé thinks that there are no funds that beat the market on average. In this case, Protoge wants to pump up the volatility of it’s side of the bet in hopes of lucking out. A smaller number of funds minimizes the tendency diversification to pull results toward the average.
Protégé may yet win the bet, but their strategy seems to imply that they too are betting against hedge funds.