We should weigh Warren Buffett’s words carefully, given his success and wisdom.  Of course, he’s got an error rate, too, like we all do.

For investors who don’t care about the volatility of their investment returns, money managers who hedge their portfolio exposures may not be a good fit, as their returns will be muted by the insurance they buy.  Then again, if you were happier at the end of 2008 losing 20% of your hedged investment in a market meltdown instead of 50% in the S&P 500, then perhaps hedge funds might be helpful.  The S&P 500 has a Sharpe Ratio running under 0.5, while the hedge fund space ekes out something over 1.0 on average, with the best fund managers putting up much higher risk-adjusted returns over time.  If I am responsible for a pension fund or endowment, I think I am sleeping better with those higher Sharpes.

I do agree that 2-and-20 (standard 2% management fee plus 20% of performance upside) are too expensive for most investors to pay, as it isn’t clear they are getting the superior performance for these fees.  On the other hand, 5-and-44 for Renaissance’s Medallion Fund seemed to be priced too low back in the day, and investors were sad when their investments were returned when Medallion closed to them.

The Oracle Of Omaha targets his criticism carefully, and I applaud the example of charitable giving he sets.  But it is important for all of us in earshot to understand where we are similar to him in risk preferences and investment goals, and where we are very different.