#1 Active versus Passive Investing

Hare versus Tortoise?

Warren Buffet’s million dollar bet (if you don’t know about it, read about it here)

Seems to be a Tortoise and Hare parable

A calm and steady (tortoise-like) S&P500 index fund out-paces, in the long-run, nimble and dynamic (hare-like) hedge funds.

Although there is some irony that Warren Buffett, the ultimate poster-boy for active investing, would back a passive index fund over active hedge funds, it is fair to say that Buffett’s active investing style is very distinct from those of hedge funds – certainly much more tortoise-like than hare-like.

Nevertheless, the story serves to show that a passive, broadly diversified equity portfolio is a hard benchmark to beat, and, perhaps, the Efficient Markets Hypothesis is a pretty solid null hypothesis.

So, is there any defense for the hedge fund industry?

Perhaps. But first we need to understand the concept of “alpha”