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Collection: Warren Buffett - #319 'Hedge Funds Are a Fad with Huge Fees'


Video Link: https://youtu.be/ads3XvUrH_Q


In this episode, Warren Buffett was asked does he think it makes sense for individual investors to invest a part of their capital in hedge funds?


In this episode, you’ll learn:

  • What are the red flags in hedge funds?

To check out all Collection: Warren Buffett <click here>

 

[Transcript]

(Source: https://buffett.cnbc.com/2004-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:00

My simple question is, do you think it makes sense for individual investors to invest a part of their capital in hedge funds, or a fund of hedge funds, somewhat like the $600 million investment Berkshire made in Value Capital?


WARREN BUFFETT 00:17

Yeah, I would say that people that are now investing in hedge funds, in aggregate, are going to be disappointed.


You don’t get smarter because you’re running something called a hedge fund, or something called private equity, or something, you know, called anything — an LBO fund.


But what you do gain periodically is the ability to merchandise those things. I mean, there are fads in Wall Street, and Wall Street will sell what it can sell, just remember that. You know, that may be as good as what the fellow quoted up in the upper levels there.


And the hedge fund right now is in the midst of a fad. It’s distinguished not by the ability to make more money. It’s distinguished by the extraordinary amount of fees that are collected.


And believe me, if the world on $600 billion of money, is paying 2 percent fees, and a percentage of the profits, and the losers go out of existence, and the winners continue for a while, and take money off the table, it is not going to be a great experience, in aggregate, for investors.


Obviously, there are a few smart, honest people out there running funds, and they can — they will do quite well. But if you buy them across the board, in my view, you’re going to get a bad result.


Charlie?


CHARLIE MUNGER 01:40

Yeah, why would you want to invest with a guy whose basic thought process runs something like this, “If a second layer of fees on top of a first layer of substantial fees is good for an investor, then a third layer of fees must be better yet?”


Why would you invest with somebody with a proposition like that?


WARREN BUFFETT 02:06

It — just the idea of taking two percent, you know, plus percentages on top of that, that reflects — you know, it may be what the traffic can bear, you know, Collis P. Huntington style, but that reflects an attitude toward people that we tend to regard as partners, investors — I just think it’s a basically unfair type of arrangement.


And I don’t like getting in — in general, I think it’s a mistake to get in with people who propose unfair arrangements.


You know, in effect they’re getting — probably getting four times standard fees to begin with. And then on top of that, they say we want part of the action. And I would guess in many of those cases, that they don’t have all of their own money in the fund themselves. Maybe they have a substantial sum outside.


Charlie and I both run — ran — partnerships in the ’60s, and ‘50s with me, and into the ’70s with him, that would generally be classified as hedge funds. They had the compensation arrangement somewhat similar, although not like they are now. And we did some —


They had some similarities, but I don’t think we had quite the attitude toward the people who were trying to — that were asking to join us — that the present managers have. It’s —


As Charlie said, the fund-to-funds type stuff, I mean, it’s really sort of unbelievable just piling on layer after layer on costs. It doesn’t make the companies that are underlying these stocks they buy any better. I mean, it —


And believe me, people don’t become a genius just because you walk into some office, and it says “hedge funds” on the door. I mean they are — what they may be very good at is marketing. In fact, if they’re good at marketing, they don’t have to be good at anything else.

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