Warren Buffett has a $1 million charity bet with Protégé Partners. It started on 1st Jan 2008 and lasts for 10 years; the bet is on the performance of a fund of hedge funds from Protégé verses an S&P 500 tracker from Vanguard.

At the Berkshire Hathaway annual general meeting a delighted Buffett gave the six year update on the bet: Hedge funds at 12.5% and the S&P 500 at 43.8%.

Only people without much grasp of the basics of investing would put money in a hedge fund however it is worth considering some of the issues around tracker funds.

Key points to consider are:

  • Fees Over a typical saving period you could have virtually double the performance using a tracker fund with the lowest fees compared to a tracker fund covering the same index with high fees.
  • Stock lending Many tracker funds loan shares to short sellers. This obviously increases risk but is acceptable providing the fees go to the investor. It’s worth checking if this is done and if so the policy on splitting the spoils.
  • Physical verses Synthetic There are two basic replication methods. Physical means that the underlying stocks are purchased which is pretty much as safe as possible. Synthetic means that a swap agreement is entered into with an investment bank and as a result the solvency of the investment bank is a risk factor. The funds invested will still be held in some sort of collateral but this may well be unable to recover any losses.