What if Berkshire Hathaway Operated as a Hedge Fund

New York (HedgeCo.net) Warren Buffet and the hedge fund industry have been locked in a war of words of late with Dan Loeb of Third Point Capital firing the latest shot when he called Mr. Buffet a hypocrite. The Washington Post published an interesting article that looked at how Berkshire Hathaway would have performed over the last 28 years if it employed the traditional 2% management fee and the 20% incentive fee.

Given how Mr. Buffet has been so critical of hedge funds over the years, it is a very unlikely scenario, but it did produce some interesting statistics. With the help of a man by the name of Keith Goggin, who the article describes as a “fee-averse Wall Street guy”, the article simulated what would have happened for investors as well as Berkshire as the manager given the hedge fund fee arrangement.

According to the article and Goggin’s statistics, Berkshire had an average compounded return of 17.4% from 1987 through 2014. If the “2 and 20” fee schedule was applied to the returns, the return drops to 12.4%, which is still well above the return of the S&P 500 over the same time period.

What would be interesting to see is how a hedge fund index would have performed without the “2 and 20” fee arrangement over the same time period. Perhaps a simulation of how the index would have performed with a flat 2.5% fee like the one charged by HedgeCoVest. This would show the how the strategies compare without the fees and then could be compared to the performance of Berkshire over the years.

Rick Pendergraft
Research Analyst

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