Endowments and foundations routinely allocate capital to a diverse portfolio of alternative investments, including hedge funds, private equity and venture capital. But most struggle to beat a passive index. That reality – the futility of the strategy pursued by many supposedly sophisticated investors – was painfully illustrated by the “Buffett bet.”

The bet was a $1 million wager made almost 10 years ago, and put the 10-year performance of the S&P 500 against a selection of five hedge fund-of-funds from 2008-2017. You can read more about how Protégé ended up on the losing side of the bet with Buffett in my recent article featuring an interview with Seides.

Jeff Tarrant delivered a keynote speech at the MIT Sloan 2018 Investment Conference on March 16, where he discussed why Protégé lost the bet but still considers it a win. Our readers can judge whether Tarrant is justified in his rationalizing of losing the bet, but everyone should question whether a diversified fund of hedge funds, with its high fees, can beat a low-cost index over a 10-year time horizon.

He is the founder and chairman of Protégé Partners LLC, a fund of hedge funds, and of MOV37, which specializes in machine-learning investment strategies. Tarrant’s reputation as an investor came into the limelight when he worked with John Paulson to use credit-default swaps to successfully bet that the housing bubble would collapse during the financial crisis.

I’ll explain why Tarrant claimed that losing to Buffett was a win for him, but first let’s look at how the wager was set up.