Shocker — Warren Buffett is winning a million dollar bet he made about investing 7 years ago.

Back in 2008, Buffett bet that the S&P 500 would beat sophisticated hedge funds over the next 10 years as the economy recovered.

Carol J. Loomis at Fortune reports that Buffett wagered on Vanguard's 500 index fund, which is now up 63.5 percent, compared with a hedge fund index made by Protégé Partners – the managers with whom he made the bet. 

Protégé's index is up an estimated 19.6 percent.

Though Buffett's index fund has beaten Protégé's selection the past six years, last year was a particularly bad one for hedge funds. Citi recently forecast a 30 percent decline in hedge fund profits due to poor performance in 2014. And a hedge fund benchmark from Preqin, a research company, registered its lowest return in three years.

Whoever wins the bet will donate $1 million to their charity of choice. (Each side initially put about $320,000 into a zero-coupon Treasury bond that they estimated would be worth $1 million by 2018. It's since been moved into Berkshire Hathaway stock, with a personal guarantee from Buffett of $1 million if the stock doesn't reach that price.)

Check back in three years to see who winds up in the money.

And read the full Fortune story here >>

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The whisper on Wall Street is that hedge fund titan Bill Ackman's returns are not as impressive as recently published reports would have you believe.

Last week Bloomberg published hedge fund titan Bill Ackman's lifetime returns. The story cited data from LCH Investments NV, a firm that invests in hedge funds. LCH calculated that Pershing Square, which had a monster 2014 of 40% returns, made $4.5 billion for his clients that year.

LCH also said that, over its lifetime, Pershing Square has made $11.6 billion for its clients.

This $11.6 billion figure is the one some of Ackman's industry peers do not believe.

To that end, some of them have been sending around a chart — embedded below — that shows Ackman's lifetime returns have only been $8.5 billion, more than $3 billion less than the reported figure.

Here's the chart:

The disparity between LCH's figure and the one noted in the chart above has to do with a side bet, or "special purpose vehicle" or "SPV," that Ackman allowed some of Pershing's clients to make with him over the past few years.

It's well publicized that the SPV's 2008's investment in Target was a big loser for Pershing, and that he raised $2 billion for it. This calculation assumes that he lost it all.

Pershing also created SPVs for investments in Burger King, McDonald's, Sears, and most recently Air Products.

LCH did not respond to requests for comment.

All this said, with either $8.5 billion or $11.6 billion in capital returned, Ackman has no doubt been a successful hedge manager these past few years.

The real news here, then, is how quick hedge fund land is to send out charts like the one above. They just don't like Ackman or believe his numbers.

Got more numbers? Send them to llopez@businessinsider.com

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This is a story about appreciating your talents, and letting them take you to the top.

In an interview with OneWire's Skiddy von Stade, Ben Carpenter explained his ascent to co-CEO of brokerage firm Greenwich Capital, after learning he wasn't the best trader on Wall Street.

After starting his career at Bankers Trust and a brief stint at Morgan Stanley, Carpenter became a salesman at Greenwich Capital. After a couple successful years selling, Carpenter was moved over to the trading desk. 

"I was really excited about this because I always wanted to be a trader, and I knew that I was going to be a terrific trader and so I enthusiastically accepted the job, and for the next two years I proved myself to be maybe one of the worst traders in the history of Wall Street," Carpenter said.

After two years without profits, Carpenter (along with the rest of the firm) knew he had to do something else. It was then that Greenwich Capital founder Ted Knetzger approached Carpenter with an executive offer as the company's chief financial officer.

Despite his initial reluctance to return to sales, Carpenter actually ended up turning down the CFO position and went back to selling. 

"When I looked in the mirror, I realized I had a deep-seated need to get back to doing something I was good at and that I could contribute to the firm at," Carpenter said. "I went back to sales with a renewed appreciation for doing something I was good at, and a renewed determination to really contribute to the firm."

Carpenter said it was this decision that ultimately got him to the CEO position.

"I am confident that if I had taken Ted up on his generous offer to be the CFO, I wouldn’t have been able to lead by example and lead from strength and I would never have gotten to become the head of the company."

Greenwich Capital is now RBS Securities, and Carpenter is the Vice Chairman of CRT Capital. 

Watch the full OneWire interview above and subscribe to the series to get new interviews as soon as they are posted.

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Billionaire hedge fund manager Paul Singer — the CEO of $25 billion Elliott Management — defended the hedge fund compensation structure, suggesting that bankers are the ones investors should be upset about. 

Since the financial crisis, hedge funds for the most part have struggled to produce strong returns relative to passive strategies, making it difficult to justify the fees they're paid.

Typically, fund managers are paid through a compensation structure commonly known as the "2 and 20," which stands for a 2% management fee and a 20% performance fee. More specifically, "2 and 20" means a hedge fund manager would charge investors 2% of total assets under management and 20% of any profits. The fees can vary from fund to fund, with some charging less and others charging more such as "3 and 30." 

In Singer's latest investor letter, dated Jan. 30, he writes that investment banks "are effectively big, highly leveraged hedge funds." He said his team conducted some analysis to see how banks compared with hedge funds in terms of compensation and costs. Singer writes that banker compensation "as a percentage of value produced at major banks is significantly higher than at hedge funds.

"At the very least, it calls into question the rationale of investors who comfortably own significant positions in major financial institutions but confine their criticisms of complexity and compensation to hedge funds." 

Here's the excerpt from Singer's letter:  

In our last quarterly report, we took a swipe at CALPERS’ decision to exit hedge funds. After sending out the report, we had a minor epiphany. We have been (correctly) saying that the world's major financial institutions are effectively the largest hedge funds on the planet, with their fortunes dominated by trading results, however packaged. At the same time, some institutional investors are cranky that the returns of hedge funds during the six years (and counting) since the introduction of QE have been less than unhedged stock and bond returns during that period, and that hedge funds are too complicated and their fees and costs too high. These investors may have forgotten that before the financial crisis, many carefully selected hedge funds performed admirably in controlling risk and generating a true diversity of returns. This combination got us thinking: Since the financial institutions are effectively big, highly-leveraged hedge funds, we wondered how they compared with hedge funds in terms of compensation and costs.

The results of our team's study of this comparison (don't worry, it didn’t take much time) were quite enlightening. Using reported market and financial performance for 2014, we found the bottom line is clear: By every measure, employee compensation at major financial institutions is significantly higher than that at hedge funds.

We surveyed the five major U.S.-based investment banks and found that employee compensation accounted for 59% of the "gross adjusted change in market capitalization" — the increase in market capitalization in addition to buybacks and dividends, and after adding back compensation expense. It was 64% of "gross adjusted pretax income"— GAAP pretax income after adding back compensation expense. At hedge funds, employee compensation accounted for 23% of "gross adjusted returns"— net returns with compensation expense added back. Similar results were obtained when examining employee expenses as a percentage of capital. Bank compensation was 19% and 22% of beginning market capitalization and tangible book value, respectively, compared with 3.1% of total capital for hedge funds.

Although undoubtedly there are certain nuances and distinctions, we believe our analytical approach, if anything, is likely to be more, not less, generous to large financial institutions. For instance, the adjusted change in market value benefits from a year in which bank multiples generally expanded. Nor did we subtract from bank earnings the value of the considerable subsidy these institutions enjoy from their "too big to fail" status. Nevertheless, and keeping these considerations in mind, we think these analyses are meaningful in demonstrating that employee compensation as a percentage of value produced at major banks is significantly higher than at hedge funds. At the very least, it calls into question the rationale of investors who comfortably own significant positions in major financial institutions but confine their criticisms of complexity and compensation to hedge funds.

Singer, who has an estimated net worth of $1.86 billion, is also ranked No. 9 for the all-time performing hedge fund managers, according to fund-of-funds LCH Investments.

In 2014, Elliott returned 8.2% compared to the S&P 500's 13% rise. Hedge funds, on average, returned only 3.78% last year, according to the research firm Preqin.

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Societe Generale charted how hedge funds rate various asset classes these days in a note Wednesday.

Hedge funds are particularly positive on the S&P 500 and gold, but they're not really into commodities like copper, especially since prices tanked recently.

With the combo of loose monetary policy by the European Central Bank and "the hawkish mood of the Fed," hedge funds are convinced the dollar will continue rising against the euro.

Here's the chart from SocGen:

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Last year was a tough one for hedge funds.

A recent Citi survey found hedge fund profits down for the year about $10 billion dollars – or 30 percent – from the year prior, and indexes from research firms eVestment and Preqin put hedge fund returns up around 3 percent – just a fraction of the S&P 500's 13.7 percent return.

But there were of course some winners.

Here are some common traits that last year's top performing funds shared, courtesy of Preqin's 2015 Global Hedge Fund Report:

Their core strategies were probably equity strategies.

Of the top 20 performers, 75 percent used equity strategies. Of the top 10, equity strategy funds had a higher median return (59 percent) than any other type.

They've most likely been active for more than five years.

57 percent of all top performers had been active at least since 2009.

There's a good chance their manager was based in North America.

13 percent of top performing managers were based in New York, 4 percent in Canada, and 3 in California.

They tended to be less risky.

They invested heavily in India.

Last year's No. 1 performer was Arcstone Capital's Passage to India Opportunity Fund, a long-bias, value-oriented fund that saw a 225 percent net return.

Two other top performers were Alchemy India Long-Term Fund (up 60 percent) and ArthVeda Alpha India L50 (up 39 percent).

Though this may have seemed like an obscure bet at the beginning of 2014, India's Sensex, the benchmark index of the Bombay Stock Exchange, actually rose about 30 percent throughout the year.

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Thomas S. Gilbert Jr. pleaded "not guilty" in the murder of his hedge fund manager father before a a grand jury in New York on Thursday. 

Gilbert Jr. was indicted on Thursday in New York State Supreme Court with murder in the second degree and criminal possession of a weapon in the second degree, among other charges, Manhattan District Attorney Cyrus Vance said in a release. 

Back in January, the 30-year-old socialite was arrested and charged with the fatal shooting of his father, Thomas S. Gilbert Sr.

On Jan. 4, the elder Gilbert was found dead with a gun wound to the head at his apartment at 20 Beekman Place in Manhattan's Upper East Side about 3:30 p.m. 

Police told Business Insider at the time there was allegedly an "argument over money." ABC News reported that investigators said that the father had discussed no longer paying his son's rent and reducing his weekly allowance. The New York Post reported it was over a $200 cut in his monthly allowance.

The younger Gilbert went to his parents' apartment on Jan. 4. According to police, Gilbert asked his mother, Shelley, to go out and get him a sandwich. When she returned, she found her husband dead and her son gone. 

A .40 caliber Glock handgun was found on the elder Gilbert's chest, according to the complaint. Police believe that the younger Gilbert staged the scene to look like a suicide, according to the indictment. 

The younger Gilbert was the only other person in the apartment at the time, police told Business Insider. He allegedly fled the scene on foot. The next day he was taken into custody after being confronted at his Chelsea apartment on West 18th Street.

According to the indictment, police recovered four loose rounds of .40 caliber ammunition, a magazine for the .40 caliber and another loaded firearm from Gilbert Jr.'s Chelsea apartment. Police also found a skimmer device and more than 20 blank credit cards in the younger Gilbert's apartment, the complaint said.

The elder Gilbert was the founder of long-short equity hedge fund Wainscott Capital Partners. Gilbert, who had more than 40 years of experience on Wall Street, opened the fund in 2011.

Thomas Gilbert Jr. attended elite private schools — The Buckley School and Deerfield Academy. He later graduated from Princeton University.

He seems to have recently tried to launch his own hedge fund, Mameluke Capital Fund LP, according to an SEC form D filed in 2014.

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A judge tossed out former Brazilian soap opera star Adriana Ferreyr's $50 million lawsuit against her ex, billionaire hedge fund legend George Soros, Page Six reports.

According to Page Six, the judge decided to nix the suit following an alleged outburst from Ferreyr. 

"The judge said, 'That's it. Case dismissed. Your behavior is contemptuous,'" an unnamed source told the New York Post.

This isn't her first alleged outburst, though. A year ago, Soros' lawyer said that she swung at him knocking off his glasses after she lunged at Soros hitting him in the head during his deposition. 

Back in 2011, Ferreyr filed a lawsuit against Soros claiming he reneged on a $1.9 million apartment he promised her.

In the suit, Ferreyr said they dated for five years and she was dumped in 2010. She was 27 at the time and he was 80.   

She claimed that one night during a romantic reunion that Soros whispered that he gave the apartment he allegedly promised her to another woman. Ferreyr also claimed that he slapped her across the face and attempted to choke her, according to a report in the New York Post that cited court documents. The suit also claimed Soros attempted to strike her with a glass lamp, but missed and she ended up cutting her foot.

Soros later countersued Ferreyr for defamation and assault. He claimed that she threw the lamp at him.

Soros, 84, is now married to Tamiko Bolton. 

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One of the world’s largest activist hedge funds has made a bet worth nearly £100m on Britain’s solar power industry, The Sunday Telegraph can disclose.

Elliott Capital Advisors, the UK arm of the American hedge fund, has put money into half a dozen unnamed projects capable of generating about 85 megawatts – making it one of the largest privately-held solar power operators in the country.

Elliott has hedged its bets by taking out short positions in five other renewable energy funds listed on the London stock market. It made its biggest bet against a firm last week, spending an estimated £9m to short 2.21pc of The Renewables Infrastructure Group (TRIG).

The hedges amount to a £17m position against the publicly-traded renewable firms. Elliott is thought to have spent up to four times as much so far in building its own solar projects.

Elliott is shorting Bluefield Solar Income Fund, which has 12 projects in England and Wales; John Laing Environmental Assets, which invests in seven renewable projects; and Nextenergy Solar Fund, with three projects underway; and Foresight Solar Fund, which owns Wymeswold, until recently the country’s largest solar farm.

Almost £8bn was invested in renewable energy in 2013, according to figures cited by the Department for Energy and Climate Change. The Government has committed to meeting 15pc of the UK’s energy needs from green sources by 2020, and has introduced incentives such as renewable obligation certificates, a subsidy that generators sell to suppliers. However, this particular subsidy could be drawing to a close this year.

Elliott is best known in Britain for taking stakes in companies in order to push through sweeping changes. The fund lost a campaign to instal its own directors at National Express, and bought Game Group in 2012.

This article was written by Marion Dakers Financial services editor from The Daily Telegraph and was legally licensed through the NewsCred publisher network.

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When you run one of the world's most successful hedge funds, you can probably afford some pretty amazing stuff. 

So it makes sense that Steve Cohen, with an estimated net worth of $10.3 billion, has a long list of incredible personal purchases.

Cohen started SAC Capital in 1992, and became a Wall Street legend after his firm saw returns of 70% for two consecutive years.

Cohen is known for his love of art, having spent lavish amounts on famous artwork by Pablo Picasso, Jasper Johns, Damien Hirst, Andy Warhol, Jeff Koons and more. He also enjoys buying up real estate, and owns several properties, each worth millions of dollars.

If you're looking for a good use of an hour, Raoul Pal has a fantastic 50-plus-minute in-depth interview with Texan hedge fund manager Kyle Bass posted on Real Vision Television.

Last year, Pal, a former GLG fund manager, launched Real Vision Television — an on-demand subscription video service providing a library of content on economics and investing. He did it because he wanted to have real, uninterrupted discussions with some of the brightest minds in the industry that you just can't get with a soundbite on financial television. 

Pal's interview with Hayman Capital's Bass, which was filmed in October during the Barefoot Economic Summit, takes a deep dive into Bass' career and how thinks and feels about investing. The interview covers how Bass got into the hedge fund business, finds and structures his trades, constructs his portfolio, manages his team, and how free diving/spear fishing has helped him in the office. 

The interview also shows a side of Bass that we haven't seen before during his other interviews.

"I constantly feel inadequate, which may be what drives me," Bass told Pal. 

Later on, he elaborated when Pal asked him how he dealt with the negativity that comes with running a fund when things aren't going so great.  

"I think, as you know, the people who are really really good at this are ... how do I put it? They're not tremendous social people, right. They all have these crazy quirks and interesting lifestyles. They're generally all good people, the ones I've met ... I live in constant fear. Again, I live with this constant feeling of inadequacy that drives me so hard to succeed and be a proven fiduciary ... And that's what's always driven me. There are these two forces in life — positive reinforcement and negative reinforcement." 

Bass said he was able to manage the negativity by having a network of folks in the business whom he regularly communicates with. 

"I think you internalize it [the negativity] to a certain extent," Bass said. "If you have a great team, you just talk it out with your team. I think communication is key. It's like in life that communication is key with anyone that you're close to. In this case we talk all the time. I have such a tremendous network of CIO friends ... that I share thoughts, concerns, feelings with and bounce things off of. That friend network that's both intellectual and emotional from a support perspective is how I deal with it." 

Check out the full interview posted on Real Vision Television >>

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Billionaire Leon Cooperman, the founder of Omega Advisors, said his fund's returns last year were "embarrassing." 

The fund dropped 4.2% in the fourth quarter of 2014. Omega ended the year down 2.8%, according to the latest investor letter posted by ValueWalk. 

"We are disappointed by our 2014 performance, both in absolute terms and relative to relevant equity-index benchmarks," Cooperman wrote. 

He continued: "Our 2014 performance was embarrassing and we failed to deliver acceptable returns. But while we clearly lost the sprint, we are confident that we will continue to win the marathon and provide attractive investment results over a relevant investment time-horizon. Our only solace is our long term record of outperformance and the knowledge that the greatest baseball hitter of all time, Ted Williams, struck out 709 times out of 7,706 plate appearances, but was teh last player to hit over .400 and had a lifetime batting average of .344."

In the letter, Cooperman says that they were over-weighted in the underperforming energy sector and under-weighted in the outperforming sectors like healthcare, technology and consumer staples. What's more is Cooperman says he "missed the mark" with his energy call. He didn't anticipate oil prices falling from $110 per barrel to $60 per barrel at the end of the year. 

Last year was a challenging year for most active funds managers. According to research firm Preqin, hedge funds on average returned just 3.78%, the lowest annual return since their 1.85% loss in 2011. For comparison, the Standard & Poor 500 rose 13% last year.

SEE ALSO: Leon Cooperman says these are the traits he looks for when hiring analysts

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Daniel Loeb of Third Point LLC writes in his latest investor letter that increased volatility has turned 2015 into a "haunted house market."

Here's Loeb: 

Already, 2015 has been marked by increasing volatility, prompting a banker friend (hat tip to Jimmy L.) to characterize this as a "haunted house market" where a new scary event lurks around each corner. Out of this year's 25 trading days, 22 have had intra-day moves in the market of more than 1%.

Haunted house scares so far this year have included: 1) signs of lower growth across the globe despite falling oil prices; 2) the depegging of the Swiss Franc, which caused an overnight 15% move; 3) declining currencies from Japan to Europe putting pressure on US companies' earnings and competitive position; 4) a disconnect between when the Fed expects to raise rates and what the market is forecasting; 5) the rise of populism and the anti-austerity left in Europe which has underscored how fragile the "union" of this fragmented continent is today; 6) Russian incursions into the Ukraine; 7) chaos in the Middle East; 8) a surprising lack of leadership on the international stage by the United States and an apparent unwillingness to take decisive action to promote democracy abroad; and 9) a seeming decline in government respect for rule of law, shown by numerous executive actions, confiscations of property, and use of various departments — ranging from the IRS to the Treasury — to intimidate citizens and interfere with legal commerce. 

Last summer, Wall Street was begging for volatility so that it could trade. Once markets started getting choppy, however, traders all over the Street found it was too much to handle.

In the letter, Loeb writes his fund had "mediocre" results in 2014. The Third Point Offshore Fund gained 5.7%. 

Overall, though, 2014 was an underwhelming year for most hedge funds. According to the research firm Preqin, hedge funds on average returned a paltry 3.78%, the lowest annual return since their 1.85% loss in 2011. For comparison, the Standard & Poor's 500 rose 13% last year.

Loeb writes that his fund's lackluster results were due to "a combination of poor trading during market volatility and bad judgment in exiting positions for reasons ranging from 'overstaying our welcome' to impatience seeing our thesis through in choppy markets."

This year, Third Point has lowered its gross and net exposures. Loeb writes that the firm was "too high for too long" last year.

"Despite recognizing that volatility had increased last year, in hindsight, our net exposures remained too high for too long due to conviction in our long stock picks and a small short book," Loeb writes.

Loeb also acknowledged that for the first time since 2008 Third Point was hurt by the market's five big drawdowns in 2014. He writes that they missed out on opportunities to buy stocks "cheaply during periods of panic." 

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Texan hedge fund manager Kyle Bass' war against the US pharmaceutical industry has officially begun.

The founder of Hayman Capital has filed an inter partes review (IPR) petition with the US Patent and Trademark Office challenging Acorda Therapeutics' patent of its flagship drug Ampyra–a treatment that helps improve walking in Multiple Sclerosis patients.  

Shares of Acorda Therapeutics (ACOR) were last down 8%. 

In early January, Bass revealed at a conference that he has a "short activist strategy" against the US pharmaceutical industry and its "BS patents."

"We'll have a separate pharmacy vehicle. We've dedicated half of our resources over the past six months to this," Bass told attendees at the Skagen New Year's Conference in Copenhagen during his presentation titled "The US Has A Drug Problem."

Bass told conference attendees that "pay for delay" is coming to an end for drugmakers. He also said he planned to file IPR petitions to challenge the validity of drugmaker patents. 

"This will change the way pharma companies [manage] their BS patents," Bass said. 

He continued: "The beautiful thing is this will lower drug prices for everyone."

Bass is scheduled to speak Tuesday at 5 p.m. EST at The Economist's Buttonwood Gathering at the Time Warner Center in Columbus Circle. We'll be covering the event. 

Here's a chart:

Here's the IPR petition: 

IPR2015-00720 (Petition) by Markman Advisors

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Texan hedge fund manager Kyle Bass is speaking on a panel at The Economist's Buttonwood Gathering at the Time Warner Center in Manhattan.

He's on a three-person panel.

We're going to update this post live with his comments. Be sure to refresh this page for updates. 

So far, the conversation has focused on central bank policy and the outlook for 2015. 

Bass was asked about currencies. He's a macro event-driven fund manager. 

"The Fed is backed into a corner," he says. He thinks the Federal Reserve will have to raise rates in June. 

The moderator asked Bass if we can stay in this low interest rate environment. 

"Here, we believe the skilled workers in the US are fully employed," he said, adding that he thinks we'll see wage growth. 

He said that Quantitative Easing has widened the income gap in the US. 

"I make this point frequently. I think the unintended consequence of [Quantitative Easing] has been in the widening income gap," Bass said.

This, he explained, has benefitted the rich.

"How many rich people are poorer today than they were in '08? I don't know any." 

He continued:"...I think once you enter this kind of policy you must stick with it. I think the next recession will be a tougher one because you'll have fewer tools to revert the outcome."

We're still hoping they'll ask him about his new "activist short strategy." Bass recently revealed that taking on the US pharmaceutical industry and their patents. 

Earlier today, the Hayman Capital founder filed his first inter partes review (IPR) petition with the US Patent and Trademark Office challenging Acorda Therapeutics' patent of its flagship drug Ampyra–a treatment that helps improve walking in Multiple Sclerosis patients.  Shares of Acorda fell 9.65% on the news. 

Just last month, Bass announced at a conference  in Copenhagen that his fund has a separate pharmacy vehicle with half of the fund's resources dedicated to it.  

Bass told conference attendees that "pay for delay" is coming to an end for drugmakers. He also said he planned to file IPR petitions to challenge the validity of drugmaker patents. 

"This will change the way pharma companies [manage] their BS patents," Bass said at that conference. 

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Texan hedge fund manager J. Kyle Bass, the CIO of Hayman Capital, has a really neat business card. 

On one side is his contact info in English, and on the reverse side he has the same info written in Katakana, which is how the Japanese write words from other languages.

Bass' most famous trade right now is his bearish bet against Japan. For years he has been predicting a debt collapse there. 

Here's one side of the card: 

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Hedge fund manager Leda Braga took the reins of BlueCrest Capital's spinoff computer-driven firm, Systematica Investments, last month and she's already killing it.

Braga, who, when she was president of BlueCrest, held the title of lady hedge fund manager with the most assets under management, earned her BlueTrend fund a 9.52 percent return last month, CNBC reported.

Her best bets were "unspecified" bond bets, the report said, but she also profited from stocks and energy securities. Like most hedge funds, BlueTrend, which uses a managed futures strategy, saw some losses after the Swiss central bank's surprise currency move – but nothing Braga couldn't recover from.

Note, hedge funds didn't do particularly well overall last month – eVestment's hedge fund index was down 0.03 percent in January.

So it looks like Braga made some great calls.

Read the full story from CNBC >>

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Hedge fund manager Bill Ackman, who was a top performer in 2014, is putting on a hedge fund conference on Thursday 

On February 12, Ackman, the CEO of $18 billion Pershing Square Capital Management, and Mark Axelowitz, managing director from UBS Private Wealth Management, will co-host the 2015 Harbor Investment Conference at the AXA Equitable Building in Midtown Manhattan.

The annual event brings together investors to share trade ideas, while raising money for the Boys & Girls' Harbor.

We've heard that Ackman isn't presenting an investment pick, but that he will do a big Q&A at the end of the event.  In addition to Ackman, some of the big-name speakers this year include Larry Robbins (Glenview Capital) and Ray Dalio (Bridgewater Associates). Ackman will be interviewing Dalio, we're told. 

Business Insider will be there covering the event.  

Below is a review how last year's investment picks did. Let's say these nine stock picks make up a portfolio.  If we take the stocks and have them all equally weighted, the performance of this portfolio would be approximately 25.40%, according to our calculations.  For comparison, the S&P is up 15.41% in the same time period.

Ackman, 48, had a monster year in 2014, netting 40.4% for the year, according to the performance report for the fund.

Overall, 2014 was an incredibly underwhelming year for hedge funds. According to research firm Preqin, hedge funds on average returned just 3.78%, the lowest annual return since their 1.85% loss in 2011. 

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Billionaire Carl Icahn thinks that Apple is worth $216 per share, according to a new letter posted on his website.

Shares of Apple were last trading up 2.2% at around $124 per share.

Reuters notes that at $216, Apple "would be worth about $1.3 trillion, or about the size of South Korea's gross domestic product."

Icahn has been massively bullish on Apple for quite some time.

In his latest letter, Icahn writes that he has increased his forecasted earnings per share for 2015 from $9.60 to $9.70.

Icahn owns around 53 million shares of Apple worth $6.5 billion. He said that he has not sold a single share of the tech giant's stock. 

Here's the letter: 

Dear Twitter Followers:

We were pleased to hear Tim Cook yesterday state publicly: “By and large, my view is, for cash that we don’t need – with some level of buffer – we want to give it back [to shareholders]. It may come across that we are, but we’re not hoarders.”  This position with respect to excess cash is great news for shareholders, and we look forward to the capital return program update in April, anticipating it will include a large increase to share repurchases.

On August 13, 2013, when Apple was trading at just $66.77, we originally notified our twitter followers of our conversations with Tim Cook and of our request that Apple take advantage of its excess liquidity by repurchasing its dramatically undervalued shares.  Despite significant share appreciation over a relatively short timeframe to $122 per share, we believe the same opportunity exists for Apple today.  More recently, skeptics (including bullish Wall Street analysts) questioned our financial model’s forecast for robust growth, disclosed in a letter to Tim Cook on October 9, 2014 in which we again urged Apple to increase share repurchases.  Since then, we have gained further confidence in our thesis, increasing the forecasted EPS for FY 2015 in our model from $9.60 to $9.70, and now believe the market should value Apple at $216 per share.  This is why we continue to own approximately 53 million shares worth $6.5 billion, and why we have not sold a single share.

With respect to our increased EPS forecast of $9.70, we believe it’s important to note that we assume a 20% tax rate for the purpose of forecasting Apple’s real cash earnings, not the 26.2% “effective” tax rate used by Apple. We consider this an essential adjustment that many analysts and investors simply fail to understand. To further clarify, unlike many companies (including Google), Apple does not state that it plans to permanently reinvest international earnings. Because Apple does not state this, accounting rules require Apple on its income statement to accrue for an income tax on unremitted earnings, but it is a non-cash tax since Apple likely will not repatriate the international cash at today’s tax rate. Therefore, we believe the correct way to treat this non-cash tax for the purpose of valuation is to add it back to earnings, reflected in our EPS forecast. Since our previous letter, the consensus EPS (among the 31 analysts who have updated their EPS targets since January 28th) for FY2015 has dramatically increased to $8.59. Interestingly, if we make the same tax adjustment to this consensus EPS, the adjusted result is $9.31. So, while previously criticized by some of these analysts as being too aggressive, our updated EPS forecast of $9.70 is now only 39 cents above the tax adjusted consensus, and actually below several of the forecasts within that tax adjusted consensus.

When we compare Apple’s P/E ratio to that of the S&P 500 index on the same basis (but without any tax adjustment to the S&P 500 forecasted FY2015 EPS or P/E), we find that the market continues to value Apple at a significantly discounted multiple of only 10x, compared to 17x for the S&P 500:

We believe this P/E multiple discrepancy between Apple and the broad market index is totally irrational. It seems to us the market is somehow missing a very basic principle of valuation: when a company’s future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple. In FY 2016 and FY 2017 we forecast in our model EPS growth of over 20% per year, and if Apple introduces a TV in FY 2016 as we expect, this EPS growth accelerates to over 31% per year in our model. Because of this, we believe the market should value Apple at a P/E of at least 20x, which together with net cash of $22 per share, would value Apple shares today at $216 per share. This is not a future price target. $216 is what we think Apple is worth TODAY. Also, to the extent Apple introduces a TV in FY 2016 or FY 2017, we believe this 20x multiple is conservative.

Given that our estimated value for Apple (excluding the introduction of a television) represents an 84% price appreciation from where the common shares trade today, we continue to hope that Tim Cook and Apple’s Board of Directors, on behalf of all shareholders, take advantage of this dramatic market value anomaly and increase the magnitude and rate of share repurchases while this remarkable opportunity still exists.

It is now plainly obvious to us that there will be no stopping Apple’s peerless innovation track record and best-in-class ecosystem of services, software, and hardware, and that Apple will continue dominating the premium smartphone market by continuing to take premium market share from Google’s Android operating system (and Android-device manufacturers) while at the same time maintaining or growing average selling prices and gross margins. We look forward to the introduction of the Apple Watch in April, as well as the launch of other new products in new categories.

The updated forecast from model is included on the following pages.

Additionally, on October 9, 2014 we wrote a long letter to Tim Cook that expressed our thoughts on Apple in greater detail.

Sincerely,

Carl C. Icahn

Brett Icahn

David Schechter

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Just as stock picks sometimes head in the wrong direction upon purchase and call into question whether a thesis is early or wrong, so too has hedge fund underperformance over the last seven years raised the question of whether hedge funds are bent or broken. Standing seven years into a 10-year wager with Warren Buffett, we sure look wrong.

What follows is an assessment of what happened, and an outlook on where to go from here. A number of cyclical headwinds have hindered hedge fund returns, particularly over the last six years. When put under a microscope, hedge funds look a little better than they appear on the surface.

The late Peter Bernstein liked to say that despite what we may think, we don’t know what will happen in the future. We believe that those extrapolating from the recent past to call for the demise of the hedge fund industry are probably a bit extreme. Our contention is that the last seven years may prove one of many periods when lean times are followed by fat ones.

The Bet

Buffett’s Big Bet (“The Bet”) took the view that high fees would ultimately doom hedge funds to underperform the S&P 500 over long periods of time. As he described it at the Bet’s inception:

Costs skyrocket when large annual fees, large performance fees, and active trading costs are all added to the active investor’s equation. Funds of hedge funds accentuate this cost problem because their fees are superimposed on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

Buffett’s case implies that the market should win by approximately the amount of fees paid to the hedge fund and fund of funds managers. However, after seven years of live action, the lead taken by the S&P 500 is substantially more than the difference in fees would suggest.

Just over half (24.4% ÷ 43.9% = 55.6%) of the underperformance by hedge funds can be attributed to fees. A full 19.5% of cumulative underperformance, or approximately 2.6% per annum, must have been caused by something else.

Furthermore, the first year of the Bet, 2008, heavily favored hedge funds, so the “something else” was even more pronounced thereafter. Over the last six years, the S&P 500 returned 159%, in comparison to the 57% return of the fund of funds. Using our estimates, fees subtracted 22% cumulatively from returns over those six years, accounting for only 21% of the performance shortfall in this stretch.

Over the vast majority of the Bet’s duration, 79% of the outcome has been determined by something other than fees. So much for the 80/20 rule!

Six Separate Years, One Distinct Environment

The “something else” can be discovered when breaking down the components of a hedge fund’s return. Stated simply, the return earned by a hedge fund is a function of the beta embedded in the strategy, the return on cash balances, the alpha from security selection, and the fees and expenses incurred along the way.

We believe the headwinds faced by hedge funds have resulted from a combination of the substantial outperformance of the S&P 500 over global equity markets and the adverse impact of the Fed’s Zero Interest Rate Policy (ZIRP) on hedge funds relative to other investment vehicles. Together, these factors wreaked havoc on a bet, the prospects of which we initially felt quite confident about. As we intend to show, the residual performance after adjusting for the impact of this investment environment manifests a return stream that could have been beneficial to a diversified portfolio of risk assets under different circumstances.

Mismatched Market Exposure

We believe the S&P 500 is not an appropriate benchmark for a portfolio of hedge funds. That said, it’s hard to fault Warren for choosing the S&P 500 as a proxy. Even if it is not intellectually pristine, the S&P 500 is used extensively by investment organizations, clients, and the press as a generic bogey for almost everything related to the asset management industry. I like to quip that the index is so pervasive that upon receiving a semi-annual report card from my children’s school, my son’s teacher said, “He is performing nicely in math and reading. You should be proud of his work, but he’s still not keeping up with the S&P 500.”

Hedge funds generally, and the fund of funds chosen for the Bet specifically, diversify geographically, have a small-cap bias, and take on much less market risk than a fully invested long-only portfolio. As such, the Bet represents an apples-to-oranges comparison when pitting hedge funds against the S&P 500. The S&P 500 was one of the best performing indexes in the world over the last seven years, providing a boost from market exposure relative to more diversified hedge fund portfolios.

The fund of funds in the Bet has essentially matched the performance of the globally diversified MSCI ACWI Index — what a difference the selection of an index makes! We approximate that the underperformance of global markets relative to the S&P 500 contributed 2.3% annually to the shortfall of hedge funds in the Bet.1 On the other hand, hedge funds benefited by approximately 0.5% annually from their small-cap bias.2 Together, we estimate these risk factors boosted the S&P 500 relative to hedge funds by approximately 1.8% per annum or 13.7% cumulatively.

Reduced Risk

While we do not know the precise magnitude of the underlying beta in the Bet’s fund of funds, we believe the underlying funds averaged 40–60% net long. Assuming these funds carry half the risk of the market (represented by MSCI ACWI and adjusted for a small-cap bias), the reduced market exposure subtracted another 1.8% gross of fees per annum, or 13.3% cumulatively relative to the S&P 500.3

The Impact of the Fed

The lower market exposure and lack of risk-adjustment in the Bet did not concern us at the time of its launch. Back in 2007, we believed the high valuation of the S&P 500 relative to history did not augur well for Buffett’s benchmark selection. Putting numbers behind our contention, money manager GMO predicted at the time that the S&P 500 would return −1.1% real (approximately +0.6% nominal) per annum over the subsequent seven years.4 According to their estimates, history would suggest that the 7.3% annual gain of the S&P 500 since stood only a 15% chance of occurring.

Why did this outlier occur? Most commentators would point to the impact of central bank intervention on the US equity market. The absolute level of interest rates has a direct effect on hedge fund returns. In taking rates from a market-driven level to zero through quantitative easing (QE), we believe the Fed had a dramatic impact on lowering hedge fund returns over the last six years.

Level of Interest Rates

The investment of cash balances is a source of hedge fund returns, but an inconsequential one to the return of the S&P 500. In the ZIRP environment since 2009, hedge funds have earned 0% on their cash. Depending on the particular strategy, a hedge fund might hold anywhere from 0–90% of its net assets in cash.5 Assuming cash balances average 20%, for the long-short equity strategies in the bet, and short-term interest rates stood at an historical average of 2.8%, a hedge fund’s return would have been 0.6% per annum (4.3% cumulatively) higher than it has been over the last seven years.6

Cost of Shorting Stock

Over this period, we believe the cost for hedge fund managers to borrow stock rose significantly due primarily to low interest rates and secondarily to increased transparency and more competition in the stock loan market. When a manager shorts a stock, the security is borrowed from the beneficial owner, such as an index fund, through a middleman, a Wall Street bank’s prime brokerage division. The beneficial owner, in turn, receives cash collateral for the stock, pays interest to the borrower on the cash, and reinvests the proceeds at a higher rate to earn a spread.

Before 2009 beneficial owners generated most of their security lending income from the reinvestment of cash above a risk-free rate and a smaller component from the difference between the risk-free rate and the borrow rate paid to the lender. However, after taking a few lumps while chasing yield in 2008, lenders became more conservative in their reinvesting. As a result, we’ve found that beneficial owners have charged more (paid less in interest) to lend stock for desired shorts to fuel profits in their security lending effort.7

We believe that transparency in the stock loan market has structurally benefited lenders at the expense of middlemen and borrowers. New technology brought price discovery to the security lending market and attuned lenders to the market lending rate for each stock in their portfolio. When markets were opaque, middlemen and borrowers had asymmetric information about prices and took advantage of less-informed lenders. Today the playing field has leveled for good.

Lastly, the growth of the hedge fund industry has created more competition for desirable stock to short. With more demand, the market rate charged to hedge funds to borrow stock has risen. We estimate that the costs of stock borrowing are 5% per annum higher today than before 2009, the preponderance of this increase is attributable to the lower level of short-term interest rates.8 For a hedge fund with 40% short exposure, this cost would have detracted from returns by 2% per year or 14.9% cumulatively.

Sum of the Parts

Putting together this set of hedge fund return drivers reveals a surprising set of results. After adjusting for the market environment, hedge funds had a positive residual return amounting to slightly more than the amount of fees they received. With all the hullaballoo created by lovers and haters of the investment vehicle, we appear to have a tie.

The KISS Principal Gone Awry

Public scrutiny of hedge funds tends to focus on the underperformance of traditional asset classes, which was embedded in the Bet. As the argument goes, surely all of these sophisticated alternative strategies have no use when we could have just invested in plain old stocks and bonds and performed better.

Making an accurate prediction is hard, especially about the future. As it turns out, alongside the Bet we created an unintended experiment that tests this theory and calls into question the logic of those who claim today that indexing in stocks and bonds was obviously the way to go seven years ago.

At the launch of the Bet, we split and pre-funded the proceeds that would eventually go to the victor’s charity of choice. We decided at the time that having more than $1 million in 10 years would be wonderful for the charity, but having less would be unpalatable. As a result, we placed the present value of $1 million in a zero-coupon bond with the intention of letting it sit and mature 10 years hence.

As revealed on the Long Bets Foundation website, commentators on the wager were universally appalled at this decision. Those weighing in on the choice to buy a zero-coupon bond at the low yield of 4.5% went as far as to claim that the only loser in the Bet would be the charity that receives the funds at the end, proclaiming, “Can’t [this] money go to the Girls Inc. of Omaha now to get better value on [the dollars?]”

As it played out, the zero-coupon bond was one of the best performing investment vehicles in the world during the financial crisis. By the end of 2012, the Bet proceeds had risen over 50%, from $640,000 to approximately $950,000. With the prospect of making only 5% cumulatively for the next five years, we switched the collateral into shares in Berkshire Hathaway stock.9 At the end of December 2014, those proceeds had grown to $1.68 million. The 14.8% annual performance of the Bet collateral has dramatically surpassed the S&P 500, hedge funds, and almost anything else over the period. As the cliché goes, hindsight is 20/20!

The Next Seven Years

One conclusion to draw from this analysis is that hedge funds may have been no better or worse than traditional strategies per se, offering instead a different return stream and set of risk factors that can be beneficial in a diversified portfolio of assets in the right environment. Proper consideration of an allocation to hedge funds going forward should consider the pricing and outlook for these particular risk factors relative to those embedded in traditional asset classes.

As a starting point, our outlook for traditional stocks and bonds is far from rosy. Bonds generated a 10.9% annual return over the last six years, leaving the 10-year Treasury below 2.0% today.10 It’s hard to imagine a repeat of that performance over the next stretch.

Stocks may not fare much better. After returning 17.2% per annum over the last six years and trouncing active managers across the board, the S&P 500 and its rapid rise should give investors pause. Jim Grant recently took the move towards indexation to task, stating “passive equity investing is a good idea. It is such a very good idea, in fact, that it has become a fad . . . Today we have a Nifty 500.”11 Grant further quoted an active manager, whose words about the cyclicality of passive and active management resonate strongly:

Long bull markets tilt the investment debate in favor of the autopilot approach . . . it’s at that moment that everybody says, “Why do I need a manager?” . . . If you go back and look at 2000 and 2007, there were strong calls for indexing, and the data looked very pro-indexing at those moments . . . And everybody completely forgot about that when active managers beat the market on the way down.

As far as hedge funds are concerned, we think structural characteristics are moving in favor of investors. First, fees are coming down. In response to a period of challenging returns, the industry is in the midst of a wave of innovation geared towards offering the attributes of hedge fund allocations at a lower cost. Second, as the US economy appears on stronger footing and QE comes to an end, interest rates may rise in the ensuing years. In a “normal” environment, hedge fund returns will increase due to higher interest rates on cash balances and short rebate proceeds. Third, although global diversification has hindered returns over the last seven years, the same outcome may not occur in the next seven.

In summary, the upcoming environment will likely be more conducive to hedge fund success than it has been — a point echoed elegantly by Ben Inker of GMO:

If we are in an environment today where we aren’t sure whether stocks are very overvalued or whether they have been repriced to give a lower, but still fair, return, taking equity risk in a fashion that has less duration looks like a pretty good idea . . . The strategies that most fit the bill are the very “hedge fund-y” strategies that have so disappointed investors in recent years . . . if you can find a way to do it more cheaply (or you can actually find some managers talented enough to pay for their fees), we believe now is a pretty good time to be on the look-out for shorter-duration ways to take standard risks.

These seven lean years for hedge funds may go down in the annals of market history as a period driven singularly by central bank stimulus. Using that lens, it becomes less clear that the Bet, if lost, proves that hedge funds are not worth an investment across a cycle.

If the Bet continues on its current course, there’s always the next 10 years. We happen to know firsthand that Warren couldn’t be more excited to watch that period unfold.

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