Warren Buffett wins over alternative investments

31st January 2018
-IAM, News

Erika Mesmer, Client Relationship Manager

In 2007 Warren Buffett challenged hedge fund managers, claiming that over a ten years period the S&P500 Index, composed of US equities, would outperform any portfolio of hedge funds. The challenge was accepted by one fund manager, Ted Seides of Protégé Partners, who selected five hedge funds that he expected to outperform the S&P500 index in the decade to come. Ten years later, there is no doubt about the winner: Warren Buffett and the S&P500. The win was so clear, that Ted Seides conceded the win early, as the hedge funds he had selected only returned 2.2% annually (until the end of 2016), while the S&P500 returned 7.1% over the same period.

Looking at the Swiss market, did the hedge funds fare better during the last ten years? As basis of our analysis we took sub-indices of the Pictet LPP 2005 Index, which act as reference indices for the Swiss pension fund universe and include alternative investments. We compared the returns of the Swiss equities Index, the Swiss Performance Index (SPI) with the Hedge Fund Index HFRX Global Hedge Fund CHF Index. So, what do you think? Who won over the last ten years?

Let’s first look at the Swiss equities. Over the ten years period from 2008 to 2017, the SPI had its ups and downs, but overall, progressed solidly and returned annually +4.5%. The Hedge Fund Index in turn also experienced turbulent moments and returned over the period annually -1.7%. Not only did hedge fund lag Swiss equities by far, but they also lost investors’ money!

This outcome does not surprise us at all. True to our investment philosophy we are convinced that investing directly in the real economy over the long term generates solid investment results for our clients. We have always refused to invest in hedge funds as we consider these products difficult to understand and not transparent.

So, ready to take a bet for the future? What asset class do you think will return more in the next ten years until the end of 2027? Equities or hedge funds? Our pick is clear, we remain true to our convictions and continue to invest in equities of companies active in the real economy.