Buffett’s Hedge Fund Bet: How Iron Gate Compares

Every spring, Warren Buffett releases his annual letter to shareholders. The wisdom that Warren Buffett gives, and the simple way he gives it, has made his annual letter one of the most widely read documents dealing with investing and the markets. At Iron Gate Global, it’s certainly one of our favorite annual letters, and this year was no exception.

Proper capital allocation, the good and the bad about companies buying back shares, how great America as a country is, and the importance of low-fees were among the several topics Buffett discussed this year.

However, one topic that stood out to me was his update to the big Buffett bet. In Buffett’s own words, he describes the bet:

In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. (page 22 of his annual letter)

The interesting thing about this bet, was that very few Hedge Funds took him up on the offer. He said he “sat in silence” waiting for someone to take him on the bet. After a while, a few finally did, and the results for the Hedge Funds were abysmal.

The S&P 500 index fund (VOO) is up 85.4% since the wager began in 2008. Of the five funds of funds (Hedge Funds), the closest is up 62.8% followed by 28.3%. If the hedge-funds goal was to outperform the market, which I would guess it is by the nature of the bet, they failed miserably.

After reading about the current results in the annual letter, I immediately thought, “I wonder how Iron Gate Global would compare?” We’re not a hedge fund, but we do invest money for individuals trying to build wealth and we do charge a fee for doing so. Let’s look at the results.

Iron Gate Global vs. the S&P 500

Before we share with you our results, you need to understand that we don’t invest every client’s money the way you will see below. We invest clients’ money based on their risk tolerance and their objectives. We do have a significant group of clients whose risk tolerance and goals are such that we try to outperform the market. A portfolio with this type of goal (outperforming the market) means that the volatility in the account will be more than that of the market. For clients that can’t stomach that kind of volatility, we ratchet down the risk along with the potential reward. If we do this, the goal of outperforming goes away, and the goal of the client is the one we seek (which should be, and is always, the case anyways).

The numbers for the S&P 500 are taken right from Warren Buffett’s annual letter (page 22). We added the growth of $100,000 to his numbers to make the example more relevant for people.

Our aggressive portfolio, with the goal of market outperformance, is called the All-Cap Value Portfolio. All returns below are after fees.

IGGA-Buffett-Comparison
*Please see disclosures below

Over the time frame that Warren Buffett is using for his Hedge-Fund bet, our All-Cap Value portfolio outperformed the market by 1.57% annually, or 22.6% net after fees. Had you invested $100,000 at the same time, you would have made $22,644 more with Iron Gate Global.

A few important notes you must understand. These returns do not mean we will continue to outperform the market. Past returns are not indicative of future returns. It also doesn’t mean we won’t make mistakes. We certainly have made our fair share. We’ve mentioned them in our blog, and each quarter we share what we could have done better with our clients.

However, what this does mean is that there are good managers out there; we believe we are one of them. We believe we have the knowledge and skill to give you, at the very minimum, a solid chance to outperform the market. If a client is willing to take the risk, and understands that risk, then we will work hard every day to try and make it happen. We’ve been doing it since 2000, and have built a track record that we are proud of.

Wise investing,

Brett Pattison
To see our historical results since the firm started, click here.

What We’re Reading

Warren Buffett’s Annual Letter– We don’t really need to say more than this. It’s a must read each and every year.

Thomas Jefferson’s List for those wishing to be on their best personal behavior – This isn’t necessarily just investment related, but it is life related. (Our favorite is Rule #3 and Rule #4 as it relates to money.)

Investing in a rising interest rate environment: What you need to know. Warren Buffett this week discussed bonds and mentioned that he couldn’t see any rationale why someone would ever buy a long-term bond right now. We agree! With the Fed poised to raise interest rates, this article will discuss the potential consequences of investing in some fixed income investments.

*Disclosures: Ammussen, Hunsaker & Associates d͘.b͘.a͘. Iron Gate Global Advisors, is an independent money management firm that focuses on identifying companies with enduring competitive advantages selling below their intrinsic value. The Iron Gate Global Advisors All-Cap Value Portfolio invests primarily in stocks, and cash. The strategy tries to identify companies with enduring competitive advantages selling below their intrinsic value. The S&P 500 Index measures the performance of the 500 largest publicly held companies actively traded in the United States. The investment returns shown include capital gains and the reinvestment of dividends and coupon income. The returns have been adjusted to include the cost of transactions (commissions and other expenses on the purchases and sales of securities) and, when applicable, the investment advisory fee. Information herein has been obtained from sources which we believe to be reliable, but accuracy is not guaranteed. Clients with at least one year with Iron Gate that have the acceptable risk tolerance are included these returns. For more information about this portfolio please contact Brian Hunsaker at 888-591-0334 or brian@igga.com. These figures represent past performance and do not guarantee future results. Figures were calculated using asset-weighted returns until 2016.

Categories: Markets and Strategy.