Key Takeaways
- • Warren Buffett advised the City & County of San Francisco Employees' Retirement System ($20 billion in assets) against a proposed 15% hedge fund allocation ($3 billion investment), recommending index funds instead as a volatility reduction strategy.
- • Buffett reiterated his long-standing skepticism of hedge funds by referencing his 2008 $1 million wager with Protégé Capital, betting that an S&P 500 index fund would outperform a basket of hedge funds selected by Protégé over a 10-year period.
- • Hedge fund industry leaders, including Leon Cooperman (Omega Advisors) and John Burbank (Passport Capital), criticized Buffett at the SALT conference in Las Vegas last month, with Burbank characterizing Buffett as "basically a tax evader."
- • The San Francisco pension board will vote on the hedge fund allocation later in 2014, with board member Herb Meiberger opposing the investment as overly risky and expensive.
- • Buffett's public critique reflects a sustained pattern of skepticism toward hedge fund tactics, including short selling and capital-raising practices, creating a contentious dynamic between Buffett and the hedge fund industry.
Summary
Warren Buffett has once again publicly criticized the hedge fund industry, this time by advising a major public pension system against significant hedge fund exposure. A board member at the City & County of San Francisco Employees' Retirement System sought Buffett's counsel on a proposed 15% allocation to hedge funds within the pension's $20 billion portfolio, framed as a volatility reduction measure. In response, Buffett explicitly recommended against the strategy, stating in a letter obtained by Pensions & Investments: "I would not go with hedge funds — would prefer index funds."
The advice carries particular weight given Buffett's high-profile wager against the hedge fund industry. In 2008, Buffett bet $1 million that an S&P 500 index fund would outperform a group of hedge funds selected by Protégé Capital over a 10-year period. Buffett recounted this bet at the Berkshire Hathaway annual meeting in May, where Herb Meiberger, the San Francisco pension board member, was in attendance. Meiberger, who already opposed the $3 billion hedge fund investment plan on grounds of excessive risk and cost, subsequently wrote to Buffett seeking validation for his position.
Buffett's skepticism toward hedge funds extends beyond this single wager. He has consistently questioned common hedge fund industry practices, particularly short selling and the credibility of capital-raising methodologies. However, the sentiment is mutual. At the SALT conference in Las Vegas last month, hedge fund managers pushed back during panel discussions on Buffett's track record. Notably, Leon Cooperman of Omega Advisors and John Burbank of Passport Capital participated in these discussions, with Burbank making inflammatory remarks characterizing Buffett as "basically a tax evader."
The San Francisco pension plan's board will vote on the proposed hedge fund allocation later in 2014. Meiberger has positioned himself as the advocate for restraint, citing both the excessive risk profile and the expense structure of the proposed investment. Buffett's letter provides institutional credibility to the opposition, though the decision ultimately rests with the full board and broader governance considerations for the pension's fiduciary obligations.
The advice carries particular weight given Buffett's high-profile wager against the hedge fund industry. In 2008, Buffett bet $1 million that an S&P 500 index fund would outperform a group of hedge funds selected by Protégé Capital over a 10-year period. Buffett recounted this bet at the Berkshire Hathaway annual meeting in May, where Herb Meiberger, the San Francisco pension board member, was in attendance. Meiberger, who already opposed the $3 billion hedge fund investment plan on grounds of excessive risk and cost, subsequently wrote to Buffett seeking validation for his position.
Buffett's skepticism toward hedge funds extends beyond this single wager. He has consistently questioned common hedge fund industry practices, particularly short selling and the credibility of capital-raising methodologies. However, the sentiment is mutual. At the SALT conference in Las Vegas last month, hedge fund managers pushed back during panel discussions on Buffett's track record. Notably, Leon Cooperman of Omega Advisors and John Burbank of Passport Capital participated in these discussions, with Burbank making inflammatory remarks characterizing Buffett as "basically a tax evader."
The San Francisco pension plan's board will vote on the proposed hedge fund allocation later in 2014. Meiberger has positioned himself as the advocate for restraint, citing both the excessive risk profile and the expense structure of the proposed investment. Buffett's letter provides institutional credibility to the opposition, though the decision ultimately rests with the full board and broader governance considerations for the pension's fiduciary obligations.
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