At the annual meeting of Berkshire Hathaway, Warren Buffett advised about the danger of using hedge-fund managers for investment. According to Buffett, money spent on plumbers or dentists adds more value than on hedge-fund managers. In aggregate, investment professionals aren’t worth their fees. Investors would be better off sticking their money in a low-cost index fund.
“If you go to a dentist, if you hire a plumber, in all the professions, there is value added by the professionals as a group compared to doing it yourself or just randomly picking laymen,” Buffett, 86, said. “In the investment world it isn’t true. The active group, the people that are professionals in aggregate, are not, cannot, do better than the aggregate of the people who just sit tight.”
Vice Chairman Charles Munger, 93, said “it’s even worse than that” because some hedge fund managers with a long career in the industry — known for charging 2 percent management fees and taking 20 percent of profits — do well, attract money and then lose it.
“The investing world is just a morass of wrong incentives, crazy reporting and, I’d say, a fair amount of delusion,” Munger said.
Buffett also challenged, as he has in previous shareholder meetings, the 2-and-20 compensation model for hedge fund managers.
“If you even have a billion dollar fund and get two percent of it, for terrible performance, that’s $20 million,” Buffett said. “In any other field, it would just blow your mind.”