Why Hedge Funds Are Embracing Warren Buffett’s Classic Advice About Index Funds (2024)

To the average person, a hedge fund manager is perhaps the first image that comes to mind when thinking of a quintessential Wall Street character: a suited guru shouting orders into the phone, brokering trades that make their clientele rich. But recently, reality paints a different picture. After a subpar year in 2023, portfolio managers have been forced to shift strategies, with many turning to vanilla index funds to make up for poor performance.

Last year was a bounce back for the broader market after a dismal 2022, but it was still not kind to hedge fund investors, who expect their money managers to produce returns that beat the market averages. According to recent survey data from banking company BNP Paribas, hedge funds saw a return of 6.67% globally throughout 2023, 1.5% shy of their intended target rate. Comparatively, the S&P 500 produced a 24% return last year, allowing investors who embraced the simple strategy of investing in index funds to experience similar gains.

As a result, many of those hedge funds are altering their approaches and investing in index funds, which are being driven by the ongoing success of large cap stocks. The trend exemplifies why many retail investors heed the long-touted adage of Warren Buffett: Index funds are the best way for an investor to get stock market exposure. Hedge funds, it appears, are taking notice, too.