Investors are always looking for investments that provide a higher return. Mutual fund performance data are transparent and readily available. That is why mutual fund performance data is used by most academic studies that evaluate active management. Academic evidence shows that the keys to long-term investing success are keeping your costs low, creating an allocation based on your goals, risk tolerance and investment time horizon, and then sticking with your plan. Trying to select actively managed funds and/or switch investments as the investment environment changes has been shown to be a way to under-perform, often substantially, and lower your chances of achieving your long-term financial goals.
But, you reason, there must be a better way. Maybe something the ultra-wealthy have access to that I do not! Enter hedge funds.
Hedge funds are open to accredited investors (i.e. the ultra-wealthy) and have fewer restrictions than mutual funds. Hedge fund performance and other data is also rather opaque. See, hedge funds use proprietary techniques that must be protected from other investors that allow them to have such great performance, or is there another reason hedge fund data is opaque.
Enter Warren Buffett! He placed a bet with Protege Partners. Protege Partners are hedge fund managers. Warren bet that the S&P 500 index mutual fund, VFIAX, would outperform a basket of hedge funds selected by Protege Partners for the 10-year period from 2007 - 2016. The stakes were a $1 million donation to the charity of the winners choosing.
These high powered hedge funds with all of their flexibility should easily be able to outperform a lowly S&P 500 index fund. How did it turn out? Warren won easily. During the 10-year window the S&P 500 fund provided a compound annual return of 7.1% while the basket of hedge funds provided a 2.2% compound annual return! You read that correctly, the S&P 500 index fund outperformed by 4.9% annually!
Maybe there is another reason hedge funds do not openly provide data on performance! Hedge funds often charge 2% annually plus 20% of profits above a certain threshold. Those costs are very hard to overcome.
If you are trying to create wealth over the long-term, choose an evidence based investing approach tailored to your goals, risk-tolerance, and investing time-horizon! Keep you costs low and stick with your plan. Those are the keys to investing success!
A detailed article on the bet can be found here: https://finance.yahoo.com/news/warren-buffett-why-index-funds-205004056.html