Hedge funds get ‘unbelievable’ fees for bad results: Buffett

Warren Buffett, the billionaire chairman of Berkshire Hathaway, said large investors should be frustrated with fees they’re paying hedge fund managers who fail to match the returns of index funds.“There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities,” Buffett said on Saturday during Berkshire’s annual meeting in Omaha, Nebraska.Hedge funds traditionally charge a management fee that’s 2% of assets, plus 20% on any profits. That’s “a compensation scheme that is unbelievable to me,” Buffett said. He added that some pension funds have disregarded his advice, and gone ahead and hired consultants.The billionaire made a bet in 2008 against Protege Partners that its strategy that invests in hedge funds couldn’t beat a Vanguard mutual fund that tracks the S&P 500 Index. The winner’s charity of choice gets $1mn when the wager ends at the end of next year.The bundle of hedge funds in Protege’s bet returned 21.9% for the eight years through 2015, according to a Berkshire presentation on Saturday. That compares with the 65.7% climb in the S&P Index fund.“I hope you realise that for the population as a whole, American business has done wonderfully, and the net result of hiring professional management is a huge minus,” Buffett said.Dan Loeb, an outspoken money manager, said last week that the industry is in the first stages of a washout, and that it’s one of the most catastrophic periods for hedge funds since he started New York-based Third Point. Popular managers including Alan Howard and Paul Tudor Jones are preparing for billions of client funds fleeing their firms, while some of the world’s largest asset managers such as BlackRock also have faced setbacks with strategies. New York City’s pension for civil employees voted this month to exit its $1.5bn portfolio of hedge funds, determining that the investments didn’t perform well enough to justify high fees. Insurer American International Group has announced plans to invest with fewer managers.“Supposedly sophisticated people, generally richer people, hire consultants. And no consultant in the world is going to tell you, ‘Just buy an S&P index fund and sit for the next 50 years,’” Buffett said. “You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.”Buffett supports the presidential candidacy of Democrat Hillary Clinton, who has lamented that the nation’s top hedge fund managers earn more than all US kindergarten teachers combined. He has also agreed with Republican Donald Trump in calling an end for a tax break that helps hedge fund managers.Buffett on Saturday also called out money managers for routing investments offshore and gaining tax advantages by creating reinsurers, a strategy that Clinton has also criticised. Berkshire is one of the world’s largest reinsurance companies and competes against such firms. Meanwhile Warren Buffett said banks’ holdings of derivatives make it unattractive to invest in most large financial firms and that the contracts still contain hidden risks.“Some of these things get so complicated that they’re very hard to evaluate,” Buffett said. “They can be extraordinarily hard to mark,” he said. “The auditors, I don’t think, are necessarily capable of holding that behaviour in check.”The remarks build on the billionaire’s critique of derivatives, even after Berkshire entered such contracts to speculate on stock movements or borrowers’ creditworthiness.Buffett said he shuns deals that could require Berkshire to post collateral, and that the larger risk is that a disruption to markets - potentially from a cyber or nuclear attack - could make it hard for the largest lenders to value their holdings.