Suppose you're a business with a lot of positive cash flow, but you also have a lot of exposure to the USD-MXN exchange rate. Maybe you have factories in Mexico but sell to the US, it doesn't matter. In that case you can pay a hedge fund to hedge your money so that if the exchange rate collapses you make enough money on the stock market to compensate, so your business will survive until the exchange rate climbs back.
Most businesses have very high exposure to one section of the market, so wanting to hedge is natural. If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.
Most hedge funds have very little to do with the kind of hedging you describe.
If you had that kind of exposure to currency risks, you wouldn't go to a hedge fund. You can easily hedge that risk yourself with futures or options. If you wanted to pay somebody for it, you would go to your banker and he would do it for you for a fraction of the 2/20 fees charged by hedge funds.
The average banker has no idea how to hedge any serious amount of money, nor does the average banker understand what kind of hedging strategy is appropriate for a business. Nothing about hedging with futures or options is easy. Also, hedge funds don't charge 2/20 anymore like in the good old days.
Nonsense. Futures and options and how to use them to hedge exchange rate risks are covered in any good masters in finance (source: I have a masters in finance). You don't even need any advanced math (the ancient Greeks were using options to hedge their olive harvests).
The bank teller might not know about them, but the bank most assuredly has people that can help you.
Also, contrary to what your posts suggests (any serious amount of money), the amount of money has no bearing on how you would hedge its risk.
According to the Shareholder's Letter, the 5 funds of funds in the bet portfolio were comprised of funds that largely did charge 2/20, with the fund-of-fund charging an addition 1% plus performance on top of that.
> The notion that hedge funds all collect a stereotypical management fee of 2 percent and a performance fee of 20 percent has been dying a slow death in recent years, especially for smaller, newer funds.
I said 2/20 fees aren't the norm anymore. You quoted from the letter. I provided a source that shows hedge fund fees are going down and remarked that the Buffett bet started before the 2008 crash when fees were higher then they are now. Because it was a boom period and because index funds that push down management fees have only recently become popular.
It seems to be that either Buffett must be mistaken or you are, right? His claim is that the funds involved in the bet are 2/20 funds, and while the bet started in 2008, it is still running today.
Technically, he claims they pay less than 2/20 but no details are provided. Nowadays 2/20 fees are considered high, not the norm. Fees are trending down. This is something you can easily verify. Buffett did say 2/20 is the "prevailing hedge-fund standard" but he's mistaken.
I guess. Mostly, I've just been nerdsniped by the claim you made that the timing of the bet could invalidate it's claim. It's a 10-year bet, so Buffett has in fact maximized his exposure to the phenomenon you describe.
