OMAHA, Neb. (HedgeWorld.com)--As part of the annual meeting of Berkshire Hathaway Inc., Warren Buffett answered investors' questions for six hours, a format that produced acerbic observations on both hedge funds and derivatives.
He said at the May 1 event that the current flow of money into hedge funds is a fad and more about Wall Street's marketing trends than about sound investing principles. "People that are now investing in hedge funds in aggregate are going to be disappointed."
Also, according to wire services reports, he said that the managers of these funds charge too much.
A spokeswoman for Berkshire Hathaway, Deborah Bosanek, said that she couldn't provide a text of the remarks, since they arose at an unscripted Q-and-A session. Mr. Buffett was not available to confirm the accuracy of the wire services reports of his comments.
But an investor who was present confirmed those reports and elaborated on them for HedgeWorld. This Berkshire Hathaway investor said that the main focus of the discussion was not underlying hedge funds but funds of funds and the view (held by both Mr. Buffett and Berkshire's vice chairman, Charlie Munger) that the layering of fees has become exorbitant. Very few funds consistently outperform the market, especially when those fees are netted out, so most of the people involved at the bottom of those layers will lose relative to what they could have gotten from a passive index.
This investor emphasized, though, that neither Mr. Buffett nor Mr. Munger said that investors couldn't find an exceptional fund manager who would outperform indexes. The point, rather, was that even if they did they should concern themselves with fees.
Another subject of discussions was the derivatives industry. Mr. Buffett long has been outspoken on this subject (see), last year calling derivatives "financial weapons of mass destruction."
During this year's meeting, Messrs. Buffett and Munger returned to that theme, saying that there must be something wrong with the accounting when both sides of many transactions report a gain. When these positions are unwound, many of those gains of necessity will prove illusory. Their position is that sometime in the next 10 years a financial crisis will either be caused or exacerbated by the dubious character of accounting for derivatives.