Buffett Buffet: A Pricey Meal

There have been conflicting reports on whether the firm's managing directors will pay the $1.7 million themselves or whether the firm will pay. If it's the firm, Salida's existing investors are footing the bill either through their management fees or as an actual operating expense of the firm (e.g., if the firm's managers designated the cost as "research" to help make its managers better investors). I contacted Courtenay Wolfe earlier this week and asked her to clarify which of these scenarios best described how Salida would pay for the lunch. She responded that it was "personal partner capital" paying for the event.

If I were an investor in Salida, and I found out that I was even partially paying for this lunch -- even through management fees, which technically would still be "partner capital" -- I would be upset, as I would interpret the managers' actions as seeking to raise the firm's profile and its assets (not make them smarter managers -- although Wolfe argues that the "firm, funds, and therefore investors will benefit from" the lunch -- or to simply help a charity, which they admitted they didn't know before bidding).

I would see part of investment being spent with the purpose of growing the firm's assets, which will benefit the firm's managers but have no impact on the future performance of my remaining assets under management with them.

It's undeniable that the winner of these lunches will continue to get at least a day of heavy media exposure. Neither Buffett nor some regulator is going to stop that. However, as the purpose of the lunches is to benefit the Glide Foundation, Buffett should require all future winners to pay personally for winning bids and refrain from mentioning any stocks discussed during the lunch to avoid questions like these in the future.

Hedge fund investors (or the due diligence consultants they hire to examine potential managers) should also educate themselves more on just how a fund charges for its expenses. For example, is it charging a "training session at a glamorous resort with spouses" as "research" or "training," which is intended to benefit investors but appear more like boondoggles. Sometimes it's not black or white but gray. However, if you see recurrent evidence of fund managers taking liberties in how the charge certain expenses to investors, it should be a big red flag.