2015: Update on Buffett's hedge fund bet.

WARREN BUFFETT: We’re approaching noon. We’ll come back at 1:00.

I promised — seven years ago I made this bet, which was originally to produce a million dollars for the charity of the winner, and another fellow who was in the hedge fund business — and I offered this bet to anybody. Only one person took me up on it.

And we made this bet where a million dollars goes to the winner’s charity, as to whether a group of five hedge funds, the funds would beat the S&P Vanguard fund.

And my point being that the fees would not overcome — would not be overcome — by managerial brilliance and that the hedge funds would fall short.

And the other fellow betting, essentially, that paying people 2-and-20, and having an override to the fund of funds, was nothing to pay for the brilliance of getting Wall Street to manage your money.

And I promised that every year I would report the update.

And the first year I fell far behind, but we reported it then.

So we’ll put that slide up. And as you can see, seven years into it, it’s interesting that just buying Vanguard fund, you know, with no — nothing but putting the S&P 500 in there, has now given a cumulative return of 63 1/2 percent, and the hedge funds are at 19 percent.

The interesting thing is, some of that is underperformance, but the hedge fund managers have done very well during that period. If they were managing a billion dollars, for example, at 2-and-20, you get $20 million a year just for coming to the office.

It’s — you know, it’s been — the hedge funds haven’t done bad. It’s the investors in the hedge funds have paid a very big price. And the — (Applause)

We originally funded this with zero-coupon bonds. We each bought about 350,000 of zero-coupon bonds that would be worth 500,000 at the end of the period.

We converted it to Berkshire Hathaway stock — so — a few years ago, the fellow on the other side of the bet did it with me. So now it now looks like the winner will get appreciably more than a million dollars.

And if you want to entertain yourself, you can go to Long Bets — on search, just put in Long Bets, and you’ll find this organization out in Washington that sort of acts as the stakeholder, sets the rules for these long bets.

And now there’s hundreds of them up there, and they’re on all kinds of predictions, and you can go there, and if you want to disagree with one of the parties on there, you can make these bets that pay off in 50 years or 25 years.