There aren’t many ways for billionaires to accumulate their massive fortunes. It typically comes down to building an extraordinarily successful business, creating a product that achieves mainstream adoption, inheriting huge amounts of money, or developing exceptional investing skills.
Some of the best-known investors attracted attention through hedge funds. Specifically, they founded or were appointed to manage hedge funds, and they generated above-average returns for multiple consecutive years. Examples of the best hedge fund managers include:
Ken Griffin of Citadel – net worth $35 billion
Jim Simons of Renaissance Technologies – net worth $28.1 billion
Ray Dalio of Bridgewater Associates – net worth $19.1 billion
Steve Cohen of Point72 Management – net worth $17.5 billion
Carl Icahn of Icahn Enterprises – net worth $17.5 billion
George Soros of Soros Fund Management – net worth: $6.7 billion
Stanley Druckenmiller of Duquesne Capital Management – net worth $6.4 billion
One name is notably absent from this list: Warren Buffett of Berkshire Hathaway, net worth $109.7 billion. But isn’t Buffett one of the most successful investors of all time? Is Warren Buffett a hedge fund manager? Is Berkshire Hathaway a hedge fund? And if not, how does Berkshire Hathaway’s business model work?
What Are Hedge Funds?
Hedge funds use often complex investment strategies to generate returns for shareholders, but the underlying structure is relatively straightforward.
At their most basic, hedge funds work like other fund products such as mutual funds and exchange-traded funds (ETFs). Essentially, investors put their money into the funds by purchasing shares, then the fund managers use the pooled capital to build profitable investment portfolios.
There are different rules governing various types of funds. The rules cover details like when and how shares are priced and purchased, as well as permissible investment strategies. For example, ETFs trade throughout the day like stocks, while mutual fund transactions occur at the end of the trading day. ETF and mutual fund shares can be sold any time, but hedge funds usually require holding periods of a year or more.
The most important difference between hedge funds and other fund products is the asset mix. Mutual funds typically invest in stocks and bonds, but hedge funds are far more likely to pull in alternative and non-traditional asset types. It is not uncommon to find real estate, currencies, and derivatives in a hedge fund portfolio.
The unique asset mix found in hedge funds brings up another crucial difference between hedge funds and other types of funds. Like mutual funds, hedge funds attempt to generate above-average returns by choosing the most profitable assets. However, hedge funds also put intense focus on risk mitigation. For example, it is common to find sophisticated derivatives strategies at work to mitigate risk in hedge funds.
One of the key strategies used by hedge fund managers involves taking both long and short positions. In some cases, these positions appear to contradict the fund’s core objective, but that’s deliberate. Hedge funds get their name because managers “hedge their bets,” or bet on multiple possible outcomes to minimize the risk of losses.
Hedge funds are nearly always closed to the public. Instead, their managers seek out wealthy clients, including institutions and individuals. Only those who meet stringent eligibility guidelines can participate. Clients rely on the reputation and past success of the hedge fund manager when making the decision to invest.
Does Warren Buffett Use Hedging?
Warren Buffett is no stranger to hedge investing. In fact, he owned and managed his own hedge fund before he took charge of Berkshire Hathaway.
He introduced Buffett Partnership, an early version of hedge funds, in 1957, and it was wildly successful. In the 12 years he managed the fund, Buffett delivered compounded annual returns of 31.6 percent before fees.
This success made the purchase of Berkshire Hathaway possible, but once Buffett took Berkshire Hathaway over, he didn’t use hedging strategies to rebuild the struggling textile manufacturer. Instead, Buffett concentrated on building a conglomerate of companies in a variety of lucrative sectors.
Berkshire Hathaway is involved in insurance, real estate, manufacturing, railways, and more. That isn’t to say Buffett has given up on buying stocks. As he nears the age of 93, he remains an active participant in the market and one of the world’s top investors.
Berkshire Hathaway owns a diverse portfolio of stocks worth more than $340 billion, and Buffett still has the final say when it comes to making trades. He adheres to value investing principles, so his goal is to buy quality companies that are undervalued.
Hedge Funds vs Berkshire Hathaway Stocks
Warren Buffett stocks have several characteristics in common, including solid financials, experienced leadership, and an enduring competitive edge. Unlike hedge funds, Berkshire Hathaway doesn’t dabble in non-traditional assets, and there are no short positions in Berkshire Hathaway’s portfolio.
Hedge funds are exclusive – only the wealthy can participate. Berkshire Hathaway takes the opposite approach – anyone can buy shares of Berkshire Hathaway. True, the Class A stock isn’t practical for most investors. It’s the most expensive stock in the world at close to $500,000 per share. But Class B stock is quite accessible at a little over $300 per share.
Finally, the objective of hedge funds is to generate returns for clients, but that’s not necessarily how hedge fund managers make money. The primary source of income for hedge funds is fees and commissions – as much as two percent of assets under management, along with a 20 percent cut of any gains.
Berkshire Hathaway, on the other hand, does not charge fees or commissions. It trades as a stock. Investors benefit from the company’s diverse portfolio of stocks and subsidiary companies, but they don’t pay for the privilege. When Berkshire Hathaway profits, shareholders profit. If Berkshire Hathaway stock goes down, shareholders aren’t paying fees in addition to realizing losses.
Is Warren Buffett a Hedge Fund Manager?
In short, Warren Buffett is not a hedge fund manager, and Berkshire Hathaway is not a hedge fund.
Buffett is one of the few billionaires who amassed a fortune by building a successful business and managing a stock portfolio simultaneously.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
