Warren Buffett’s $1 Million Bet Against Hedge Funds

In Short

• Warren Buffett bet that a simple S&P 500 index fund would beat elite hedge funds over 10 years.

• He was right. The index fund crushed the hedge funds by nearly 3x.

• Fancy strategies often come with fancy fees — and underwhelming results.

• Passive investing isn’t lazy; it’s smart for most people.

• You don’t need to be a genius to build wealth — just consistent and patient.

Imagine walking into a glitzy casino filled with the sharpest minds on Wall Street, and saying: “I bet $1 million that doing nothing fancy will beat all your financial wizardry.”

That’s essentially what Warren Buffett did in 2007.

This is the story of the most important investing bet you’ve probably never heard about — and why it could change how you think about growing your money.

The Bet Heard Around Wall Street

Let’s rewind to 2007 — the iPhone had just launched, Facebook was still for college kids, and Warren Buffett was getting seriously annoyed.

Why? Because he saw regular investors constantly being sold expensive, complex financial products that rarely delivered better returns than the good ol’ stock market.

So, he made a public wager:

Over 10 years, a basic, low-cost S&P 500 index fund will outperform a group of handpicked hedge funds.

And he put his money where his mouth was — $1 million, to be donated to charity.

On the other side was Protégé Partners, a hedge fund firm that accepted the challenge. They selected five “funds of hedge funds” — that’s a fund that invests in multiple hedge funds. (Yes, that’s like ordering a buffet of buffets.)

What Happened Next?

Let’s not forget — the timing was rough. In 2008, the financial crisis hit. The S&P 500 crashed nearly 37% that year.

But Buffett didn’t flinch.

He just sat back and let the index fund do its thing — no trading, no panic, no expensive managers.

Fast forward to 2017:

• Buffett’s index fund: +125% (CAGR - 8.5%)

• Hedge fund group average: +36% (CAGR - 3.1%)

That’s not a typo. The passive fund more than tripled the hedge fund results.

Wait… How Is That Possible?

You’d think a team of Ivy League grads with algorithms, models, and $1,000 suits would win easily, right?

But here’s the catch: High fees eat your returns alive.

Hedge funds often charge a “2 and 20” fee structure — 2% of your assets annually, plus 20% of any profits. That’s like a restaurant charging you 2% of your salary plus a cut of your dessert.

Buffett’s fund, on the other hand, had an expense ratio of around 0.05%. Almost nothing.

In investing, costs matter. A lot.

What Can You Learn From This?

Buffett's victory wasn't about genius stock picking. It was about keeping things simple, low-cost, and long-term.

Here’s what this means for you:

1. Passive ≠ Lazy

Buying an index fund isn’t about being boring — it’s about betting on the overall economy. Over time, markets rise, and so does your money.

2. Time Beats Timing

No one consistently times the market right. Buffett didn’t try. He just stayed invested.

3. Fees Are Silent Killers

Even a 1-2% annual fee can shave off lakhs from your long-term returns. Choose funds with low expense ratios.

4. You Don’t Need to Outsmart the Market

You just need to not out-dumb yourself — avoid emotional decisions, resist the latest “hot tip,” and stick with your plan.

Still Not Convinced?

If you’re thinking, “Sure, but I know a fund manager who’s beaten the market,” let me share another Buffett gem:

“In aggregate, active investors must underperform the market — because they are the market... minus fees.”

Basically: If everyone’s trying to beat the market, they become the market. And the only thing separating winners and losers? Fees and luck.

Warren Buffett’s million-dollar bet wasn’t about making money. It was about proving a point: That regular investors can build wealth by keeping it simple.

So the next time someone pitches you a “revolutionary” investment strategy, just remember the world’s greatest investor bet against that idea — and won.

And if that’s good enough for Buffett, it’s probably good enough for you too.